Your company is contemplating replacing some current machinery with more energy efficient models. You will be replacing the fully-depreciated machinery, which you could probably use two more years if you chose not to replace it. You expect the current machinery will have no value in two years. The new machinery will cost $150,000, and can be depreciated using 3-year MACRS class life. Expected yearly before-tax savings due to acquiring the new machinery amounts to about $45,000. At the end of three years, the new machinery is expected to be sold for $30,000. The cost of capital is 8 percent and the tax rate is 21 percent. Prepare a schedule of project cash flows by year. Clearly label the rows showing EBIT, OCF and Free (Total) Cash Flows. Compute the project's NPV and IRR. Do you recommend accepting or rejecting the project?
Your company is contemplating replacing some current machinery with more energy efficient models. You will be replacing the fully-depreciated machinery, which you could probably use two more years if you chose not to replace it. You expect the current machinery will have no value in two years. The new machinery will cost $150,000, and can be depreciated using 3-year MACRS class life. Expected yearly before-tax savings due to acquiring the new machinery amounts to about $45,000. At the end of three years, the new machinery is expected to be sold for $30,000. The cost of capital is 8 percent and the tax rate is 21 percent. Prepare a schedule of project cash flows by year. Clearly label the rows showing EBIT, OCF and Free (Total) Cash Flows. Compute the project's NPV and IRR. Do you recommend accepting or rejecting the project?
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
Problem 14P
Related questions
Question
Your company is contemplating replacing some current machinery with more energy efficient models. You will be replacing the fully-
- Prepare a schedule of project cash flows by year. Clearly label the rows showing EBIT, OCF and
Free (Total) Cash Flows. - Compute the project's NPV and IRR. Do you recommend accepting or rejecting the project?
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 2 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning
Cornerstones of Cost Management (Cornerstones Ser…
Accounting
ISBN:
9781305970663
Author:
Don R. Hansen, Maryanne M. Mowen
Publisher:
Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning
Cornerstones of Cost Management (Cornerstones Ser…
Accounting
ISBN:
9781305970663
Author:
Don R. Hansen, Maryanne M. Mowen
Publisher:
Cengage Learning
Fundamentals Of Financial Management, Concise Edi…
Finance
ISBN:
9781337902571
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Excel Applications for Accounting Principles
Accounting
ISBN:
9781111581565
Author:
Gaylord N. Smith
Publisher:
Cengage Learning