Net cash flows Central Laundry and Cleaners is considering replacing an existing piece of machinery with a more sophisticated machine. The old machine was purchased 3 years ago at a cost of $54,100, and this amount was being depreciated under MACRS using a 5-year recovery period. The machine has 5 years of usable life remaining. The new machine that is being considered costs $76,500 and requires $4,000 in installation costs. The new machine would be depreciated under MACRS using a 5-year recovery period. The firm can currently sell the old machine for $54,000 without incurring any removal or cleanup costs. The firm is subject to a tax rate of 21%. The revenues and expenses (excluding depreciation and interest) associated with the new and the old machines for the next 5 years are

given in the table contains the applicable MACRS depreciation percentages.) Note: The new machine will have no terminal value at the end of 5 years.

a. Calculate the initial cash flow associated with the replacement of the old machine by the new one.

b. Determine the periodic cash flows associated with the proposed replacement. (Note: Be sure to consider the depreciation in year 6.)

c. Depict on a timeline the net cash flows found in parts (a) and (b) associated with the proposed replacement decision.

Rounded Depreciation Percentages by Recovery Year Using MACRS for
First Four Property Classes

Percentage by recovery year*

Recovery year 3 years 5 years 7 years 10 years

1 33% 20% 14% 10%

2 45% 32% 25% 18%

3 15% 19% 18% 14%

4 7% 12% 12% 12%

5 12% 9% 9%

6 5% 9% 8%

7 9% 7%

8 4% 6%

9 6%

10 6%

11 4%

Totals 100% 100% 100% 100%

New machine Old machine

Year Revenue Expenses
(excluding depreciation and interest) Revenue Expenses
(excluding depreciation and interest)

1 $749,800 $720,100 $67,4700 $66,0200

2 749800 720100 676700 660200

3 749800 720100 680700 660200

4 749800 720100 678700 660200

5 749800 720100 674700 660200

Transcribed Image Text:Net cash flows Central Laundry and Cleaners is considering replacing an existing piece of machinery with a more sophisticated machine. The old machine was purchased 3 years ago at a cost of $54,100, and this amount was being depreciated under MACRS using a 5-year recovery period. The machine has 5 years of usable life remaining. The new machine that is being considered costs $76,500 and requires $4,000 in installation costs. The new machine would be depreciated under MACRS using a 5-year recovery period. The firm can currently sell the old machine for $54,000 without incurring any removal or cleanup costs. The firm is subject to a tax rate of 21%. The revenues and expenses (excluding depreciation and interest) associated with the new and the old machines for the next 5 years are given in the table. (Table contains the applicable MACRS depreciation percentages.) Note: The new machine will have no terminal value at the end of 5 years. a. Calculate the initial cash flow associated with replacement of the old machine by the new one. b. Determine the periodic cash flows associated with the proposed replacement. (Note: Be sure to consider the depreciation in year 6.) c. Depict on a time line the net cash flows found in parts (a) and (b) associated with the proposed replacement decision.
Transcribed Image Text:a. Calculate the initial cash flow associated with replacement of the old machine by the new one Calculate the initial cash flow below: (Round to the nearest dollar.) Cost of new asset Installation costs Total cost of new asset Proceeds from sale of old asset Tax on sale of old asset Total proceeds, sale of old asset Initial cash flow $ Year $ Year Profit before depreciation and taxes Depreciation Net profit before taxes Taxes Net profit after taxes Operating cash inflows (Round to the nearest dollar.) Profit before depreciation and taxes Depreciation Net profit before taxes Taxes Net profit after taxes Operating cash inflows (Round to the nearest dollar.) $ $ $ $ $ $ $ $ 696969 $ $ $ $ $ $ 1 2 Year Profit before depreciation and taxes Depreciation Net profit before taxes Taxes Net profit after taxes Operating cash inflows Round to the nearest dollar.) Year Profit before depreciation and taxes Depreciation Net profit before taxes Taxes Net profit after taxes Operating cash inflows Round to the nearest dollar) Year Profit before depreciation and taxes Depreciation Net profit before taxes Taxes Net profit after taxes Operating cash inflows Incremental cash flows (Round to the nearest dollar.) Year Profit before depreciation and taxes Depreciation Net profit before taxes Taxes Net profit after taxes Operating cash inflows Incremental cash flows $ $ $ $ $ $ $ $ $ $ $ $ 69 69 69 LA $ $ $ $ $ $ $ $ 3 4 5 6
Transcribed Image Text:Calculation the cash flows with the new machine and the net incremental cast Year Profit before depreciation and taxes Depreciation Net profit before taxes Taxes Net profit after taxes Operating cash inflows Incremental cash flows (Round to the nearest dollar.) Year Profit before depreciation and taxes Depreciation Net profit before taxes Taxes Net profit after taxes Operating cash inflows Incremental cash flows (Round to the nearest dollar.) $ $ $ $ S $ $ $ $ $ $ S 1 2 Year Profit before depreciation and taxes Depreciation Net profit before taxes Taxes Net profit after taxes Operating cash inflows Incremental cash flows Round to the nearest dollar.) Year Profit before depreciation and taxes Depreciation Net profit before taxes Taxes Net profit after taxes Operating cash inflows Incremental cash flows Round to the nearest dollar.) Year Profit before depreciation and taxes Depreciation Net profit before taxes Taxes Net profit after taxes Operating cash inflows E (Round to the nearest dollar.) Year Profit before depreciation and taxes Depreciation Net profit before taxes Taxes Net profit after taxes Operating cash inflows ---____ 6969 $ $ $ $ 6969 $ $ 69 69 69 69 69 69 67 $ $ 3 4 $ $ $ GALA $ $ $ $ $ $ $ $ $ 5 6

Question

Net cash flows Central Laundry and Cleaners is considering replacing an existing piece of machinery with a more sophisticated machine. The old machine was purchased 3 years ago at a cost of $54,100, and this amount was being depreciated under MACRS using a 5-year recovery period. The machine has 5 years of usable life remaining. The new machine that is being considered costs $76,500 and requires $4,000 in installation costs. The new machine would be depreciated under MACRS using a 5-year recovery period. The firm can currently sell the old machine for $54,000 without incurring any removal or cleanup costs. The firm is subject to a tax rate of 21%. The revenues and expenses (excluding depreciation and interest) associated with the new and the old machines for the next 5 years are

given in the table contains the applicable MACRS depreciation percentages.) Note: The new machine will have no terminal value at the end of 5 years.

a. Calculate the initial cash flow associated with the replacement of the old machine by the new one.

b. Determine the periodic cash flows associated with the proposed replacement. (Note: Be sure to consider the depreciation in year 6.)

c. Depict on a timeline the net cash flows found in parts (a) and (b) associated with the proposed replacement decision.

Rounded Depreciation Percentages by Recovery Year Using MACRS for First Four Property Classes
	Percentage by recovery year*
Recovery year	3 years	5 years	7 years	10 years
1	33%	20%	14%	10%
2	45%	32%	25%	18%
3	15%	19%	18%	14%
4	7%	12%	12%	12%
5		12%	9%	9%
6		5%	9%	8%
7			9%	7%
8			4%	6%
9				6%
10				6%
11				4%
Totals	100%	100%	100%	100%

	New machine		Old machine
Year	Revenue	Expenses (excluding depreciation and interest)	Revenue	Expenses (excluding depreciation and interest)
1	$749,800	$720,100	$67,4700	$66,0200
2	749800	720100	676700	660200
3	749800	720100	680700	660200
4	749800	720100	678700	660200
5	749800	720100	674700	660200

Net cash flows Central Laundry and Cleaners is considering replacing an existing piece of machinery with a more sophisticated machine. The old machine was
purchased 3 years ago at a cost of $54,100, and this amount was being depreciated under MACRS using a 5-year recovery period. The machine has 5 years of
usable life remaining. The new machine that is being considered costs $76,500 and requires $4,000 in installation costs. The new machine would be depreciated
under MACRS using a 5-year recovery period. The firm can currently sell the old machine for $54,000 without incurring any removal or cleanup costs. The firm is
subject to a tax rate of 21%. The revenues and expenses (excluding depreciation and interest) associated with the new and the old machines for the next 5 years
are
given in the table. (Table
contains the applicable MACRS depreciation percentages.) Note: The new machine will have no terminal value at the end of
5 years.
a. Calculate the initial cash flow associated with replacement of the old machine by the new one.
b. Determine the periodic cash flows associated with the proposed replacement. (Note: Be sure to consider the depreciation in year 6.)
c. Depict on a time line the net cash flows found in parts (a) and (b) associated with the proposed replacement decision.

a. Calculate the initial cash flow associated with replacement of the old machine by the new one
Calculate the initial cash flow below: (Round to the nearest dollar.)
Cost of new asset
Installation costs
Total cost of new asset
Proceeds from sale of old asset
Tax on sale of old asset
Total proceeds, sale of old asset
Initial cash flow
$
Year
$
Year
Profit before depreciation and taxes
Depreciation
Net profit before taxes
Taxes
Net profit after taxes
Operating cash inflows
(Round to the nearest dollar.)
Profit before depreciation and taxes
Depreciation
Net profit before taxes
Taxes
Net profit after taxes
Operating cash inflows
(Round to the nearest dollar.)
$
$
$
$
$
$
$
$
696969
$
$
$
$
$
$
1
2
Year
Profit before depreciation and taxes
Depreciation
Net profit before taxes
Taxes
Net profit after taxes
Operating cash inflows
Round to the nearest dollar.)
Year
Profit before depreciation and taxes
Depreciation
Net profit before taxes
Taxes
Net profit after taxes
Operating cash inflows
Round to the nearest dollar)
Year
Profit before depreciation and taxes
Depreciation
Net profit before taxes
Taxes
Net profit after taxes
Operating cash inflows
Incremental cash flows
(Round to the nearest dollar.)
Year
Profit before depreciation and taxes
Depreciation
Net profit before taxes
Taxes
Net profit after taxes
Operating cash inflows
Incremental cash flows
$
$
$
$
$
$
$
$
$
$
$
$
69 69 69 LA
$
$
$
$
$
$
$
$
3
4
5
6

Calculation the cash flows with the new machine and the net incremental cast
Year
Profit before depreciation and taxes
Depreciation
Net profit before taxes
Taxes
Net profit after taxes
Operating cash inflows
Incremental cash flows
(Round to the nearest dollar.)
Year
Profit before depreciation and taxes
Depreciation
Net profit before taxes
Taxes
Net profit after taxes
Operating cash inflows
Incremental cash flows
(Round to the nearest dollar.)
$
$
$
$
S
$
$
$
$
$
$
S
1
2
Year
Profit before depreciation and taxes
Depreciation
Net profit before taxes
Taxes
Net profit after taxes
Operating cash inflows
Incremental cash flows
Round to the nearest dollar.)
Year
Profit before depreciation and taxes
Depreciation
Net profit before taxes
Taxes
Net profit after taxes
Operating cash inflows
Incremental cash flows
Round to the nearest dollar.)
Year
Profit before depreciation and taxes
Depreciation
Net profit before taxes
Taxes
Net profit after taxes
Operating cash inflows
E
(Round to the nearest dollar.)
Year
Profit before depreciation and taxes
Depreciation
Net profit before taxes
Taxes
Net profit after taxes
Operating cash inflows
---____
6969
$
$
$
$
6969
$
$
69 69 69 69 69 69 67
$
$
3
4
$
$
$
GALA
$
$
$
$
$
$
$
$
$
5
6

Accepted Answer

For replacement project, all incremental values are considered during analysis.