Question

Please answer A all the way to E.
Click here to read the eBook: Replacement Analysis REPLACEMENT ANALYSIS 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 $265,000. 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 $140,000. 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 $210,000 will be realized if the new machine is installed. The company's marginal tax rate is 35%, and it has a 12% WACC. a. 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. b. 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 Depreciation Change in Allowance, Allowance, Old Depreciation New NMT in c. 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 d. Should the firm purchase the new machine? -Select- Support your answer. The input in the box below will not be graded, but may be reviewed and considered by your instructor. blank

Answer 1

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projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Data Review View Add-Ins File Home Insert Page Layout Formulas - 2x % Cut pt General Wrap Text Merge Merge & Center Center Σ AutoSum : A Fill 2 Sort & SF $ - % % 4:0 .00 8. Insert Delete Format Conditional Format Formatting as Table Styles Cell Styles Clear Filter Editing Find & Select Alignment Number Cells 10 IP IQ IRIS IT IU V W Calibri 11 AA = = = E Copy Paste Format Painter B I U - D A Clipboard Font IR661 2 IKIL IM I N 660 661 662 BIGBEE 663 note depreciation per year on old machine 664 book value = 665 sale price = 666 Loss on sale = 667 tax saving on loss on sale = 115000 575000 265000 310000 108500 35% tax 668 669 cost of new machine 1175000 670 less sale value of old machine 265000 671 less tax saving on sale of old machine 108500 672 add working capital 673 801500 674 675 A intial cash flow at year o -801500 676 677 note year depreciation cost = 1175000 old machine change in 678 rates depreciation ($) depreciation depreciation 679 A-B 680 1 20.00% 235000 115000 120000 I RRnpvbeta RATION PBP ARR invest, EAA MI-np-ir_ REPLACEMENT S HPR GMAM EAC MACRS NPV RELEVANT Rea ferences H BETA LEVERED REPLACEMENT BOND STI OPTION TO WAIT 20J 120% + ODOB 19 . * O ENG 03-11-2019

projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins - 2x % Cut Σ AutoSum : A Calibri 11 AA = = = pt Wrap Text General Ea Copy Fill 2 m Paste B I U - D SF A Merge Merge & Center Center $ - % % 4:0 .00 Format Painter 8. Conditional Format Cell Insert Delete Format Sort & Find & Formatting as Table Styles Clear Filter Select Clipboard Font Alignment Number Styles Cells Editing IR688 IKILIMINIO P IQ IRIS II IU VIW 676 677 note year depreciation cost = 1175000 old machine change in 678 rates depreciation ($) depreciation depreciation 679 A-B 680 20.00% 235000 115000 120000 681 32.00% 376000 115000 261000 682 3 19.00% 223250 115000 108250 683 12.00% 141000 115000 26000 684 5 11.00% 129250 115000 14250 685 686 687 b TOTAL INCREASE IN EARNINGS = 210000 688 incremental net cash flows year EARNINGS(1-t) + change in depreciation*(t) ROUNDED 690 1 210000*(1-0.35) + 120000*(0.35) 178500 691 2 210000*(1-0.35) + 261000*(0.35) 227850 692 3 210000*(1-0.35) + 108250*(0.35) 174388 693 4 210000*(1-0.35) + 26000*(0.35) 145600 694 5 210000*(1-0.35) + 14250*(0.35) + AFTER TAX SALVAGE 257163 (SEE NOTE FOR AFTER TAX SALVAGE] 695 696 I RRnpvbeta RATION PBP ARR invest, EAA MI-np-ir_ REPLACEMENT S HPR GMAM EAC MACRS NPV RELEVANT BETA LEVERED REPLACEMENT BOND OPTION TO WAIT STI Rea ferences 200 120% 1 + ODER 19 * * O ENG 03-11-2019 689 H

- 2x W o projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins % Cut Σ AutoSum : A Calibri 11 AA = = = pt Wrap Text General Ea Copy Fill Paste B I U - D A SF Merge Merge & Center Center $ - % % 4:0 .00 8. Conditional Format Format Painter Cell Insert Delete Format Sort & Find & Formatting as Table Styles Clear Filter Select Clipboard Font Alignment Number Styles Cells Editing IK697 IK IL IM IN IO P Q IR IS IT IU V 697 698 calcualtion of NPV 699 year cash flow pv factor @ 12% pv of cfat NOTE 700 -801500 -801500 BOOK VALUE OF NEW MACHINE 70500 701 1 178500.00 0.8929 159375.00 [1175000 X 6%] 702 2 227850.00 0.7972 181640.63 SALVAGE VALUE 140000 703 3 174387.50 0.7118 124125.58 PROFIT ON SALE 69500 704 4 145600.00 0.6355 92531.43 TAX ON PROFIT ON SALE 35% 24325 705 5 257162.50 0.5674 145920.91 AFTER TAX SALVAGE VALUE 115675 706 707 708 709 C NPV -97906 710 711 d AS NPV IS NEGATIVE, REPLACEMENT SHOULD NOT BE DONE 712 NEW MACHINE SHOULD NOT BE PURCHASED 713 714 e 715 1 IF THE EXPECTED LIFE DECREASES, THEN LESS CASHFLOWS WILL BE AVAILABLE AND SO NPV WILL DECREASE 716 2 IF WACC INCREASES, THEN ALSO NPV WILL DECREASE 717 N IRRnpvbeta RATION PBP ARR invest, EAA MI-np-ir_ REPLACEMENT S HPR GMAM EAC MACRS NPV RELEVANT BETA LEVERED REPLACEMENT BOND OPTION TO WAIT STI Rea ferences 200 120% ODER 19 * * O ENG I 1 + 03-11-2019