Question

The Everly Equipment Company's flange-lipping machine was purchased 5 years ago for $80,000. It had an expected life of 10 years when it was bought and its remaining depreciation is $8,000 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 $130,000, including installation costs. During its 5-year life, it will reduce cash operating expenses by $30,000 per year, although it will not affect sales. At the end of its useful life, the high-efficiency machine is estimated to be worthless. 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%.

The old machine can be sold today for $40,000. The firm's tax rate is 35%, and the appropriate cost of capital is 13%.

1. If the new flange-lipper is purchased, what is the amount of the initial cash flow at Year 0? Round your answer to the nearest dollar. Cash outflow, if any, should be indicated by a minus sign.

   $  

2. What are the incremental net cash flows that will occur at the end of Years 1 through 5? Do not round intermediate calculations. Round your answers to the nearest dollar. Cash outflows, if any, should be indicated by a minus sign.

   CF1	$
   CF2	$
   CF3	$
   CF4	$
   CF5	$

3. What is the NPV of this project? Do not round intermediate calculations. Round your answer to the nearest whole dollar. Negative value, if any, should be indicated by a minus sign.

   $  

   Should Everly replace the flange-lipper?

Answer 1

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projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Formulas File Home Insert Page Layout Data Review View Add-Ins Z AutoSum Cut AC Wrap Text Calibri 11 General ECopy Fill Merge & Center Paste B I U 000 Conditional Format Cell Insert Delete Format Sort & Find & Filter Select % Format Painter Clear Formatting as Table Styles Clipboard Font Alignment Number Styles Cells Editing fox FC918 EU EV EW EX EY EZ FA FB FC FD FE FF FG 904 905 everly equipment 906 depreciation per year on old machine book value 80000 (5 x 8000) 907 8000 note 908 40000 sale price = 909 40000 gain on sale = 910 0 tax on gain 911 0 912 913 914 cost of new machine 130000 less sale value of old machine 915 40000 add tax on sale of old machine 916 917 90000 918 intial cash flow at year 0 919 a -90000 920 cost 130000 old machine 921 b depreciation change in note year depreciation ($) depreciation depreciation 922 rates EAC MACRS REPLACEMENT S HPR GMAM REPLACΕM ENT STRAIGHI MI-np-i NPV OPTION TO WAIT LEASE 130% invest, EAA BOND STEIN indiffEPS EBIT RELEVANT BETA LEVERECD erences WA 08:15 ENG 24-11-2019

projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Review File Home Insert Page Layout Formulas Data View Add-Ins E AutoSum - Cut AC Wrap Text Calibri 11 General E Copy Fill Merge & Center Paste B I U +.0 .00 Conditional Format Cell Insert Delete Format Sort & Find & % .00 0 Format Painter Clear Filter Select Formatting as Table Styles Editing Clipboard Font Alignment Number Styles Cells fox FF927 EV FC FD FH EW EX EY EZ FA FB FE FF FG FI 920 old machine change in depreciation 921 note cost 130000 year depreciation ($) depreciation depreciation 922 rates 923 A В А-В 924 33.33% 1 43329 8000 35329 925 44.45% 2 57785 8000 49785 926 14.81% 19253 8000 11253 927 7.41% 4 9633 8000 1633 928 5 8000 -8000 929 930 b incremental net cash flows savings(1-t) change in depreciation*(t) 1 30000*(1-0.35)35329* (0.35) 2 30000*(1-0.35)+ 49785* (0.35) 931 year 932 31865 933 36925 934 3 30000* (1-0.35) + 11253* (0.35) 23439 4 30000* (1-0.35)+ 1633* (0.35) 935 20072 5 30000* (1-0.35)+ (-8000)*(0.35) 3700 (20000 IS SALVAGE VALUE OF OLD MACHINE, IF SOLD AT THE END OF 5 YEARS) 936 AFTER TAX SALVAGE (SO IT REPRESENTS AN OPPORTUNITY COST & HENCE DEDUCTED) 937 938 939 940 STEIN indiffEPS EBIT EE STRAIGHI NPV invest, EAA MI-np-ir REPLACEMENTS HPR GMAM EAC MACRS RELEVANT BETA LEVERED REPLACEMENT BOND OPTION TO WAIT LEASE III Rea + erences 120% WA 08:30 ENG 24-11-2019

projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Review File Home Insert Page Layout Formulas Data View Add-Ins Σ AutoSum - Cut AC Wrap Text Calibri 11 General E Copy Fill Merge & Center Paste B I U +.0 .00 Conditional Format Cell Insert Delete Format Sort & Find & Filter Select % .00 0 Format Painter Clear Formatting as Table Styles Clipboard Editing Font Alignment Number Styles Cells f&x FC940 FC FH EV EW EX EY EZ FA FB FD FE FF FG FI cash flow pv factor @ 13% pv of cfat 938 year 939 A*B A В 940 90000 0 1 -90000 941 31865 28199 1 0.8850 942 28917 36925 0.7831 23439 943 3 0.6931 16244 944 0.6133 4 20072 12310 3700 0.5428 2008 945 5 946 (20000 IS SALVAGE VALUE OF OLD MACHINE, IF SOLD AT THE END OF 5 YEARS) 947 (SO IT REPRESENTS AN OPPORTUNITY COST & HENCE DEDUCTED) 948 C NPV -2321 949 NO 950 SHOULD NOT REPLACE AS NPV IS NEGATIVE 951 952 953 954 955 956 957 958 STEIN indiffEPS EBIT EE STRAIGHI NPV invest, EAA MI-np-ir REPLACEMENTS HPR GMAM EAC MACRS RELEVANT BETA LEVERED REPLACEMENT BOND OPTION TO WAIT LEASE III Rea + erences 120% WA 08:31 ENG 24-11-2019