Question

REPLACEMENT ANALYSIS The Bigbee Botting Company is contemplating the replacement of one of its botting machines with a newer and more efficient one. The old machine has a book value of $550.000 anda remaining useful life of 5 years. The firm does not expect to realize any return from scrapping the old machine in 5 years, but it can set it now to another form in the industry for $255.000 The old machine is being depreciated by $110.000 per year, using the straight-line method The new machine has a purchase price of $1.200.000, an estimated seule and MACRS date of 5 years, and an estimated salvege value of $160,000. The applicable depreciation rates are 20%, 32, 194, 124, 115 and 64. It is expected to economice on electric power usage labor and costs, as well as to reduce the number of defective bottles. In total, an annual savings of $210,000 will be readed it the new machine is installed. The company's marginal tax rate is 35%, and it has a 12%. WACC What initial cash outlay is required for the new machine Round your answer to the nearest dollar Negative amount should be indicated by a minus b. Calculate the annual depreciation allowances for both machines and compute the change in the annual depreciation expense the replacement is made and your nearest dollar Year Depreciation Depreciation change in Allowance, Allowance, Old Depreciation swers to the What are the incremental net cash flows in Years I through 5 Round your answers to the nearest de Year 3 Year Years d. Should the firm purchase the new machine?

Answer 1

A) initial cash outlay = cost of new machine - the sale value of old machine

= 1,200,000 - 265,000

= $935,000

B) Depreciation table

Year	New depreciation	old depreciation	Change in depreciation
1	208,000	110,000	208,000 - 110,000 = 98,000
2	332,800	110,000	332,800 - 110,000 = 222,800
3	197,600	110,000	197,600 - 110,000 = 87,600
4	124,800	110,000	124,800 - 110,000 = 14,800
5	114,400	110,000	114,400 - 110,000 = 4,400

Note :-1) depreciation for old machine is given in thr question as 110,000 per year.

2) to calculate depreciation gor new machine , we first have to subtract the salavage value from from the the value and then use MACRS depreciation rate .

C) incremental cash flow

Year	1	2	3	4	5
Revenue	210,000	210,000	210,000	210,000	210,000
(-) Depreciation	(208,000)	(332,800)	(197,600)	(124,800)	(114,400)
EBT	2,000	(122,800)	12,400	85,200	95,600
(-)Tax ( 35%)	(700)	(42,980)	(4,340)	(29,820)	(33,460)
Net income	1,300	(165,780)	8,060	55,380	62,140
+ depreciation	208,000	333,800	197,600	124,800	114,400
Incremental cash flow	209,300	168,020	205,660	180,180	176,540

D)Npv of new machine = - 253,114.57

Calculate Npv using financial calculator .

Input: C0 = -935,000 , C1= 209,300 , C2= 168,020 , C3= 205,660 , C4= 180,180 , C5= 176,540

I = 12% , Npv = compute

As the Npv of the new machine is negative , we should not purchase the machine.