Replacement project example: Suppose Mayco wants to replace an existing printer with a new high-speed copier. The existing printer was purchased 13 years ago at a cost of $16,000. The printer is being depreciated using straight line basis assuming a useful life of 18 years and no salvage value. If the existing printer is not replaced, it will have zero market value at the end of its useful life. The new high-speed copier can be purchased for $23,000 (including freight and installation). Over its 5-year life, it will reduce labor and raw materials usage sufficiently to cut annual operating costs from $18,000 to $9,000. This reduction in costs will cause before-tax profits to rise by an equal amount. It is estimated that the new copier can be sold for $2,400 at the end of five years; this is its estimated salvage value. The old printer's current market value is $4,576. If the new copier is acquired, the old printer will be sold to another company. The company's marginal federal-plus-state tax rate is 40.00%, and the replacement copier is of slightly below-average risk. Net working capital requirements will also increase by $4,200 at the time of replacement. By an IRS ruling, the new copier falls into the 3-year MACRS class. The project's cost of capital is set at 11.50%. Under MACRS, the pre-tax depreciation for the copier is: Year 1 = $5,280; Year 2 = $7,200; Year 3 = $2,400; Year 4 = $1,120; Year 5 =0. Compute the initial investment outlay, operating cash flow over the project's life, and the terminal-year cash flows for Mayco's replacement project. Then determine whether the project should be accepted using NPV and IRR analysis.
Replacement project example: Suppose Mayco wants to replace an existing printer with a new high-speed copier. The existing printer was purchased 13 years ago at a cost of $16,000. The printer is being
The new high-speed copier can be purchased for $23,000 (including freight and installation). Over its 5-year life, it will reduce labor and raw materials usage sufficiently to cut annual operating costs from $18,000 to $9,000. This reduction in costs will cause before-tax profits to rise by an equal amount.
It is estimated that the new copier can be sold for $2,400 at the end of five years; this is its estimated salvage value. The old printer's current market value is $4,576. If the new copier is acquired, the old printer will be sold to another company. The company's marginal federal-plus-state tax rate is 40.00%, and the replacement copier is of slightly below-average risk. Net working capital requirements will also increase by $4,200 at the time of replacement. By an IRS ruling, the new copier falls into the 3-year MACRS class.
The project's cost of capital is set at 11.50%. Under MACRS, the pre-tax depreciation for the copier is: Year 1 = $5,280; Year 2 = $7,200; Year 3 = $2,400; Year 4 = $1,120; Year 5 =0. Compute the initial investment outlay, operating cash flow over the project's life, and the terminal-year cash flows for Mayco's replacement project. Then determine whether the project should be accepted using NPV and
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