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FinanceQ&A LibraryReplacement AnalysisThe Everly Equipment Company's flange-lipping machine was purchased 5 years ago for $80,000. It had an expected life of 10 years when it was bought and its remaining depreciation is $8,000 per year for each year of its remaining life. As older flange-lippers are robust and useful machines, this one can be sold for $20,000 at the end of its useful life.A new high-efficiency digital-controlled flange-lipper can be purchased for $150,000, including installation costs. During its 5-year life, it will reduce cash operating expenses by $50,000 per year, although it will not affect sales. At the end of its useful life, the high-efficiency machine is estimated to be worthless. MACRS depreciation will be used, and the machine will be depreciated over its 3-year class life rather than its 5-year economic life, so the applicable depreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%.The old machine can be sold today for $55,000. The firm's tax rate is 35%, and the appropriate cost of capital is 16%. If the new flange-lipper is purchased, what is the amount of the initial cash flow at Year 0? Round your answer to the nearest whole dollar.$ 2. What are the incremental net cash flows that will occur at the end of Years 1 through 5? Do not round intermediate calculations. Round your answers to the nearest whole dollar.CF1$ CF2$ CF3$ CF4$ CF5$ 3. What is the NPV of this project? Do not round intermediate calculations. Round your answer to the nearest whole dollar.$Question

Asked Oct 5, 2019

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Replacement Analysis

The Everly Equipment Company's flange-lipping machine was purchased 5 years ago for $80,000. It had an expected life of 10 years when it was bought and its remaining depreciation is $8,000 per year for each year of its remaining life. As older flange-lippers are robust and useful machines, this one can be sold for $20,000 at the end of its useful life.

A new high-efficiency digital-controlled flange-lipper can be purchased for $150,000, including installation costs. During its 5-year life, it will reduce cash operating expenses by $50,000 per year, although it will not affect sales. At the end of its useful life, the high-efficiency machine is estimated to be worthless. MACRS depreciation will be used, and the machine will be depreciated over its 3-year class life rather than its 5-year economic life, so the applicable depreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%.

The old machine can be sold today for $55,000. The firm's tax rate is 35%, and the appropriate cost of capital is 16%.

- If the new flange-lipper is purchased, what is the amount of the initial cash flow at Year 0? Round your answer to the nearest whole dollar.

$

2. What are the incremental net cash flows that will occur at the end of Years 1 through 5? Do not round intermediate calculations. Round your answers to the nearest whole dollar.

CF_{1} |
$ |

CF_{2} |
$ |

CF_{3} |
$ |

CF_{4} |
$ |

CF_{5} |
$ |

3. What is the NPV of this project? Do not round intermediate calculations. Round your answer to the nearest whole dollar.

$

Step 1

1.

Given,

Cost of New Machine = $150,000

Selling Price of Old Machine = $55,000

Cost of Old Machine = $80,000

Depreciation on Old Machine (for 5 Years) = $8,000 ×5 = $40,000

Tax Rate = 35%

Calculation of amount of initial cash flow at year 0 using excel:

Step 2

The result of above table is as follows:

Step 3

2.

Change in Operating Expense = $50,000

Cash Flow = [(Change in Operating Expense × (1-Tax rate)) + (Change in Depreciat...

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