Replacement 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.$

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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%.

 

    1. 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.
$  

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Expert Answer

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:

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A B 1 Particulars 2 Cost of New Machine 3 Less: Selling Price of Old Machine Amount (S) 150000 55000 |=B3-40000)*35% =B2-B3+B4 4 Add: Tax on Profit from Sale of Old Machine 5 Amount of Initial Cash Flow at year 0

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Step 2

The result of above table is as follows:

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A B |Amount (S) 1 Particulars 2 Cost of New Machine 3 Less: Selling Price of Old Machine $150,000 $55,000 S5,250 Add: Tax on Profit from Sale of Old Machine 4 Amount of Initial Cash Flow at year 0 $100,250

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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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В Cash Flow (S) |=50000*(1-35%)+F11*35% =50000*(1-35%)+F12*35% =50000*(1-35%)+F13*35% |=50000*(1-35%)+F14*35% =50000*(1-35%)+F15*35% Year 1 2 1 з 2 4 3 5 4 6 5

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