The Everly Equipment Company's flange-lipping machine was purchased 5 years ago for $40,000. It had an expected life of 10 years when it was bought, and its remaining depreciation is $4,000 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 $110,000, including installation costs. During its 5-year life, it will reduce cash operating expenses by $45,000 per year, although it will not affect sales. The new equipment will have zero salvage value. 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% (There will be no depreciation in its 5th year since it will already be fully depreciated.). The old machine can be sold today for $55,000. The firm's tax rate is 25%, and the appropriate cost of capital is 14%.

The Everly Equipment Company's flange-lipping machine was purchased 5 years ago for $40,000. It had an expected life of 10 years when it was bought, and its remaining depreciation is $4,000 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 $110,000, including installation costs. During its 5-year life, it will reduce cash operating expenses by $45,000 per year, although it will not affect sales. The new equipment will have zero salvage value. 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% (There will be no depreciation in its 5th year since it will already be fully depreciated.). The old machine can be sold today for $55,000. The firm's tax rate is 25%, and the appropriate cost of capital is 14%.

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter11: Cash Flow Estimation And Risk Analysis

Section: Chapter Questions

Problem 10P

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