Question

De Young Entertainment Enterprises is considering replacing the latex molding machine it uses to fabricate rubber chickens with a newer, more efficient model. The old machine has a book value of $550,000 and a remaining useful life of 5 years. The current machine would be worn out and worthless in 5 years, but De Young can sell it now to a Halloween mask manufacturer for $165,000. The old machine is being depreciated by $110,000 per year for each year of its remaining life. If De Young doesn't replace the old machine, it will have no salvage value at the end of its useful life. The new machine has a purchase price of $725,000, an estimated useful life and MACRS class life of 5 years, and an estimated salvage value of $105,000. The applicable depreciation rates are 20.00%, 32.00%, 19.20%, 11.52%, 11.52%, and 5.76%. Being highly efficient, it is expected to economize on electric power usage, labor, and repair costs, and, most importantly, to reduce the number of defective chickens. In total, an annual savings of $190,000 will be realized if the new machine is installed. The company's marginal tax rate is 25% and the project cost of capital is 15%. a. What is the initial net cash flow if the new machine is purchased and the old one is replaced? Round your answer to the nearest dollar. Cash outflow, if any, should be indicated by a minus sign. b. What is the incremental depreciation tax shield (i.e., the change taxes due to the change in depreciation expenses) if the replacement is made? (Hint: First calculate the annual depreciation expense for the new machine and compare it to the depreciation on the old machine.) Do not round intermediate calculations. Round your answers to the nearest dollar. Negative values, if any, should be indicated by a minus sign. Incremental depreciation tax shield to t o to t c. What is the after-tax salvage value at Year 5? Do not round intermediate calculations. Round your answer to the nearest dollar. Negative value, if any, should be indicated by a minus sign. d. What are the total incremental project cash flows in Years 0 through 5? What is the NPV? Do not round intermediate calculations. Round your answers to the nearest dollar. Negative values, if any, should be indicated by a minus sign. CFO 4 4 4 4 4 4 4 NPV

Answer 1

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projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Page Layout Formulas File Home Insert Data Review View Add-Ins E AutoSum - Cut AC Wrap Text Calibri 11 General ECopy Fill Merge & Center Insert Delete Format Paste 000 Conditional Format Cell Sort & Find & BIU % Format Painter Clear Filter Select Formatting as Table Styles Number Clipboard Font Alignment Styles Cells Editing fox JP336 JN JO JP JQ JR JS JT JU JV JW JX JY 336 337 338 DEYOUNG 339 340 depreciation per year on old machine 341 110000 note book value 342 550000 sale price 343 165000 loss on sale 344 385000 tax on gain tax credit 134750 345 346 347 CALCULATION OF CASH OUTFLOW cost of new machine 348 725000 349 sale value of old machine less 165000 less tax credit on sale of old machine 350 134750 351 425250 352 intial cash flow at year 0 353 -425250 a 354 EAC MACRS REPLACEMENT OPTION TO WAIT GI REPLACEMENT S NPV BETA LEVERED BOND HPR GMAM STEIN indiffEPS EBIT LEASE MI-np-ir RELEVANT STRAIGHT LINE erences 130% WA 00:05 ENG ll 21-11-2019

projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Page Layout Formulas File Home Insert Data Review View Add-Ins Cut E AutoSum - AC Wrap Text Calibri 11 General Copy Fill Conditional Format Formatting as Table Styles Merge & Center Paste B I U 090 Cell Insert Delete Format Sort & Find & % Format Painter Clear Filter Select Clipboard Font Alignment Number Styles Cells Editing fox JP372 JN JO JP JQ JR JS JT JU JV JW JX JY 354 depreciation old machine change in 355 cost 725000 note year depreciation ($) depreciation depreciation 356 rates 357 В А-В b 20.00% 358 1 145000 110000 35000 32.00% 359 2 232000 110000 122000 19.20% 29200 360 3 139200 110000 83520 361 4 11.52% 110000 -26480 11.52% 362 83520 110000 -26480 363 41760 [725000 X 5.76%]] 364 BOOK VALUE NEW MACHINE C 365 SALE VALUE OF NEW MACHINE 105000 366 PROFIT ON SALE 63240 15810 367 TAX ON PROFIT ON SALE 368 AFTER TAX SALVAGE 89190 369 370 371 372 EAC MАCRS NPV RELEVANT GI REPLACEMENTS BETA LEVERED MI-np-ir HPR GMAM STEIN indiffEPS EBIT LEASE REPLACEMENT BOND OPTION TO WAIT STRAIGHT LINE erences 130% WA 00:05 ENG 21-11-2019

projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Page Layout Formulas File Home Insert Data Review View Add-Ins Cut E AutoSum - AC Wrap Text Calibri 11 General Copy Fill Merge & Center Insert Delete Format Paste 000 Conditional Format Cell Sort & Find & BIU % Format Painter Clear Filter Select Formatting as Table Styles Alignment Number Clipboard Font Styles Cells Editing fox JP389 JN JO JP JQ JR JS JT JU JV JW JX JY incremental net cash flows d 373 savings(1-t)change in depreciation*(t) 374 year 1 190000*(1-0.25) +35000*(0.25) 375 151250 2 190000*(1-0.25) + 122000*(0.25) 376 173000 3 190000*(1-0.25) + 29200*(0.25) 377 149800 4 190000*(1-0.25) -26480*(0.25) 378 135880 5 190000*(1-0.25) -26480*(0.25) + after tax salvage 225070 379 380 cash flow pv factor @ 15% 381 pv of cfat year -425250 382 0 1 -425250 151250 383 1 0.8696 131522 384 2 173000 0.7561 130813 149800 385 3 0.6575 98496 386 135880 0.5718 77690 387 5 225070 0.4972 111900 388 389 NPV 125170 390 391 AS NPV IS POSITIVE, REPLACEMENT SHOULD BE DONE GI REPLACEMENT S HPR GMAM EAC MACRS BETA LEVERED RELEVANT STEIN indiffEPS EBIT LEASE MI-np-ir NPV REPLACEMENT BOND OPTION TO WAIT STRAIGHT LINE erences 130% WA 00:06 ENG 21-11-2019