Question

The Bigbee Bottling Company is contemplating the replacement of one of its bottling machines with a newer and more efficient one. The old machine has a book value of $575,000 and a 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 sell it now to another firm in the industry for $295,000. The old machine is being depreciated by $115,000 per year, using the straight-line method.

The new machine has a purchase price of $1,175,000, an estimated useful life and MACRS class life of 5 years, and an estimated salvage value of $155,000. The applicable depreciation rates are 20%, 32%, 19%, 12%, 11%, and 6%. It is expected to economize on electric power usage, labor, and repair costs, as well as to reduce the number of defective bottles. In total, an annual savings of $230,000 will be realized if the new machine is installed. The company's marginal tax rate is 35%, and it has a 12% WACC.

1. 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 sign.
   $
   
2. Calculate the annual depreciation allowances for both machines and compute the change in the annual depreciation expense if the replacement is made. Round your answers to the nearest dollar.

   Year	Depreciation Allowance, New	Depreciation Allowance, Old	Change in Depreciation
   1	$	$	$
   2
   3
   4
   5

3. What are the incremental net cash flows in Years 1 through 5? Round your answers to the nearest dollar.

   Year 1	Year 2	Year 3	Year 4	Year 5
   $	$	$	$	$

4. Should the firm purchase the new machine?
   -Select-Yes\No

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 A EWrap Text Calibri 11 General Copy Fill Merge & Center Paste в IU* 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 fr IK679 IK IL IM IN IP IQ IR IS IT JU 660 661 662 BIGBEE depreciation per year on old machine 663 115000 note 664 book value = 575000 sale price 665 295000 280000 666 Loss on sale= 35% tax tax saving on loss on sale = 98000 667 668 cost of new machine 669 1175000 less sale value of old machine 670 295000 tax saving on sale of old machine working capital less 671 98000 add 672 673 782000 674 intial cash flow at year 0 675 A -782000 676 depreciation cost 1175000 old machine change in 677 note year depreciation ($) depreciation depreciation 678 rates 679 A В A-B 20.00% MI-np-ir 680 1 235000 115000 120000 RELEVANT STO EAC MACRS NPV REPLACEMENT BOND HPR GMAM BETA LEVERED IRRnpvbeta RATION PBP ARR invest, EAA REPLACEMENT S OPTION TO WAIT EEE Rea erences 120% WA X 09:55 ENG 29-10-2019

projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Formulas File Home Insert Page Layout Data Review View Add-Ins Z AutoSum Cut A Wrap Text Calibri 11 General E Copy Fill Merge & Center Paste 090 Conditional Format Cell Insert Delete Format Sort & Find & BIU % Format Painter Clear Filter Select Formatting as Table Styles Alignment Clipboard Font Number Styles Cells Editing fox IQ695 IK IL IM IN IP IQ IR IS IT JU IV 676 depreciation cost 1175000 old machine 677 note change in year depreciation ($) depreciation depreciation 678 rates 679 A-B 20.00% 120000 680 1 235000 115000 32.00% 376000 681 2 115000 261000 19.00% 115000 682 3 223250 108250 12.00% 141000 683 4 115000 26000 11.00% 115000 684 5 129250 14250 685 686 687 b TOTAL INCREASE IN EARNINGS = 230000 incremental net cash flows 688 EARNINGS(1-t)+ change in depreciation* (t) 689 ROUNDED year 1 230000* (1-0.35) +120000* (0.35) 690 191500 2 230000* (1-0.35) 261000* (0.35) 240850 691 3 230000*(1-0.35) 108250*(0.35) 692 187388 4 230000* (1-0.35) 26000* (0.35) 5 230000* (1-0.35)14250* (0.35)+ AFTER TAX SALVAGE 693 158600 279913 [SEE NOTE FOR AFTER TAX SALVAGE] 694 695 696 EAC MACRS ST HPR GMAM NPV BETA LEVERED REPLACEMENT BOND IRRnpvbeta MI-np-ir RATION PBP ARR invest, EAA REPLACEMENT S RELEVANT OPTION TO WAIT Rea erences 120% WA 09:57 ENG 29-10-2019

projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Review File Home Insert Page Layout Formulas Data View Add-Ins Σ AutoSum - Cut AC EWrap Text Calibri 11 General Copy Fill Merge & Center Paste B I U +.0 .00 .00 0 Conditional Format Cell Insert Delete Format Sort & Find & % Format Painter Formatting as Table Styles Clear Filter Select Editing Clipboard Font Alignment Number Styles Cells fox IQ714 IK IL IM IN IP IR IS IT IV IU 695 696 697 698 calcualtion of NPV pv factor@ 12% cash flow pv of cfat 699 NOTE year -782000 700 0 1 -782000 BOOK VALUE OF NEW MACHINE 70500 [1175000 X 6%] 191500,00 701 1 0.8929 170982.14 702 2 240850.00 0.7972 192004.15 SALVAGE VALUE 155000 703 3 187387.50 0.7118 133378.72 PROFIT ON SALE 84500 35% 0.6355 704 158600.00 100793.17 TAX ON PROFIT ON SALE 29575 705 AFTER TAX SALVAGE VALUE 5 279912.50 0.5674 158829.87 125425 [155000 29575] 706 707 708 709 C NPV -26012 710 711 D AS NPV IS NEGATIVE, REPLACEMENT SHOULD NOT BE DONE 712 NEW MACHINE SHOULD NOT BE PURCHASED 713 714 715 IRRnpvbeta MI-np-ir ST REPLACEMENT BOND invest, EAA NPV RATION PBP ARR REPLACEMENT S HPR GMAM EAC MACRS RELEVANT BETA LEVERED OPTION TO WAIT EEE Rea erences 120% WA X 09:57 ENG 29-10-2019