Question

The Bigbee Botting 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 $625,000 and a remaining useful life of 5 years. The firm does not expect to realize any return from scrapaing the old machine in 5 years, but it can sell it now to another Arm in the industry for $250,000. The old machine is being depreciated by $125,000 per year, using the straight-line method. The new machine has a purchase price of $1,100,000, an estimated useful life and MACRS class lifa af 5 years, and an estimated salvaga value of $145,000. The applicable depreciation rates are 20%, 32 , 19, 129, 11%, and 6%. It is axpected to aconomize on electric power usage, labar, and repair costs, as well as to reduce the number of defective bottles. In total, an annual savings af $240,00D will be realized if the new machine is installed. The company's marginal tax rate is 35's, and has a 12% WACC. a. What initial cash outlay is required for the new machine? Cash outflow should be indicated by a minus sign. Round your answer to the nearest dollar. b. Calculate the annual depreciation allowances for both machines and compute the change in the annual depreciation expense if the replacement is made. Depreciation allowances should be entered as positive values. Negative change values, if any, should be Indicated by a minus sign. Round your answers to the nearest dollar. Year Depreciation Depreciation change in Allowance, Allowance, Depreciation New old 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 fimm purchase the new machina? e. In general, how would each of the following factors affect the investment decision, and how should each be treated? 1. The expected life of the existing machine decreases The new machine will look -Select- than before due to the relative -Select- or the cash flows attributable to it. -Select- 2. The WACC is not constant but is increasing as Bigbee adds more projects into its capital budget for the year. The NFV will Svi v due to a Salv capital cost. should be made.

Answer 1

Part (a)

Cost of new equipment	A	-1,100,000
Sale Value of old machine	B	250,000
Book value of old machine	C	625,000
Gain on sale of old machine	D = B - C	(375,000)
Tax rate	E	35%
Tax on gain on sale	F = E x D	(131,250)
Post tax sale value	G = B - F	381,250
Initial cost outlay	H = A - G	-718,750

Please enter -718750 in the answer box (the negative sign signifies it's an outflow)

Part (b)

Yellow colored cells contain your answers:. Figures in parenthesis mean negative values.

Year	Depreciation rate	Depreciation	Depreciation	Change
	New	New	Old
	I	J = I x (-A)	K	L = J - K
1	20%	220,000	125,000	95,000
2	32%	352,000	125,000	227,000
3	19%	209,000	125,000	84,000
4	12%	132,000	125,000	7,000
5	11%	121,000	125,000	(4,000)*

*Negative value, please enter -4000 in the answer box

Part (c)

Yellow colored cells contain your answers:

Year		1	2	3	4	5
Cost savings	A	240000	240000	240000	240000	240000
[-] Change in depreciation	B	95,000	227,000	84,000	7,000	(4,000)
Incremental EBIT	C = A - B	145,000	13,000	156,000	233,000	244,000
Incremental NOPAT	D = C x (1 - 35%)	94,250	8,450	101,400	151,450	158,600
Incremental OCF	E = D + B	189,250	235,450	185,400	158,450	154,600
Salvage vale	F					145,000
Book value	G = 6% x 1,100,000					66,000
Gain on sale	H = F - G					79,000
Tax on gain	I = H x 35%					27,650
Post tax salvage value	J = F - I					117,350
Net cash flows	E + J	189,250	235,450	185,400	158,450	271,950

Part (d)

Year	n	0	1	2	3	4	5
Net cash flows	CF	(718,750)	189,250	235,450	185,400	158,450	271,950
Discount factor for 12% WACC	DF = 1.12^(-n)	1.0000	0.8929	0.7972	0.7118	0.6355	0.5674
PV of CF	CF x DF	(718,750)	168,973	187,699	131,964	100,698	154,312
NPV	Sum of PV	24,896

Please select YES from the drop down. Since NPV is positive, the firm should purchase the new machine.

Part (e)

This can't be solved unless you tell me what are the options in each of the drop down, "Select"

Please post this sub part separately showing all the options available under the select drop down.