Question

REPLACEMENT ANALYSIS The Bigbee Bottling Company is contemplating the replacement of one of its bottling machines with a ngwer and more eficient one. The old machine has a book value of $600,000 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 $120,000 per year, using the straight-line method. The new machine has a purchase price of $1,200,000, an estimated useful life and MACRS class life of 5 years, and an estimated salvage value of $145,000. 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 $205,000 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 الا لما له ما

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins - 2x % Cut AutoSum - A Calibri 11 A A = = = V Wrap Text General E Copy Fill Paste U B B- I A SF Merge Merge & Center - Center $ -% % 4:0 .00 . Conditional Format Cell Sort & Insert Delete Format Find & Format Painter Formatting as Table Styles 2 Clear Filter Select Clipboard Font Alignment Number Styles Cells Editing GH1254 Fax O FV FW FX FY FZ GA GB GC GD GE GF GG GH GIA 1237 1238 1239 BIGBEE 1240 note depreciation per year on old machine 120000 1241 book value = 600000 1242 sale price = 265000 1243 Loss on sale = 335000 1244 tax saving on loss on sale = 35% tax 117250 1245 1246 cost of new machine 1200000 1247 less sale value of old machine 265000 1248 less tax saving on sale of old machine 117250 1249 add working capital 1250 817750 1251 1252 A intial cash flow at year 0 -817750 1253 1254 year depreciation cost = 1200000 old machine change in 1255 rates depreciation ($) depreciation depreciation 1256 B A-B 1257 20.00% 240000 120000 120000 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 STIL O Rea ferences BO 120% - ODOB 19 . * * O ENG 31-10-2019 H

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 A A = = = V Wrap Text General E Copy Fill Paste B I U B- SF A Merge Merge & Center - Center $ -% % 4:0 .00 Sort & . Find & Conditional Format Cell Insert Delete Format Format Painter Formatting as Table Styles 2 Clear Filter Select Clipboard Font Alignment Number Styles Cells Editing GE1269 for FV F W FX FY FZ GA GB GC GD GE GF GG GH GIA 1253 1254 year depreciation cost = 1200000 old machine change in 1255 rates depreciation ($) depreciation depreciation 1256 A-B 1257 20.00% 240000 120000 120000 1258 32.00% 384000 120000 264000 1259 19.00% 228000 120000 108000 1260 12.00% 144000 120000 24000 1261 11.00% 132000 120000 12000 1262 1263 1264 TOTAL INCREASE IN EARNINGS = 205000 1265 incremental net cash flows 1266 year EARNINGS(1-t) + change in depreciation* (t) 1267 1 205000*(1-0.35) + 120000*(0.35) 175250 1268 2 205000*(1-0.35) + 264000*(0.35) 225650 1269 3 205000*(1-0.35) + 108000*0.35) 171050 1270 4 205000*(1-0.35) + 24000*(0.35) 141650 1271 5 205000*(1-0.35) + 12000*(0.35) + AFTER TAX SALVAGE 256900 (SEE NOTE FOR AFTER TAX SALVAGE] 1272 1273 NOTE AFTER TAX SALVAGE VALUE OF NEW MACHINE 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 STIL O Rea ferences BO 120% - ODER 19 * * O ENG 31-10-2019 H

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 A A = = = r *Wrap Text Percentage E Copy Fill Paste B I U B- A SF Merge Merge & Center - Center $ -% % 4:0 .00 . Conditional Format Format Painter Cell Insert Delete Format Sort & Find & Formatting as Table Styles 2 Clear Filter Select Clipboard Font Alignment CD Number Styles Cells Editing GE1283 Fax FV F W FX FY FZ GA GB GCGDGE GF GG GH GIA 1273 AFTER TAX SALVAGE VALUE OF NEW MACHINE 1274 BOOK VALUE OF MACHINE 72000 [1200000 X 6%] 1275 SALVAGE VALUE OF MACHINE 145000 A 1276 PROFIT ON SALE OF MACHINE 73000 1277 TAX ON PROFIT ON SALE 25550 B 1278 AFTER TAX SALAVGE VALUE 119450 A-B 1279 1280 calcualtion of NPV 1281 year cash flow pv factor @ 12% pv of cfat 1282 0 -817750 -817750 1283 175250.00 0.8929 156473.21 1284 225650.00 0.7972 179886.80 1285 171050.00 0.7118 121750.01 1286 141650.00 0.6355 90021.14 1287 256900.00 0.5674 145771.96 1288 1289 NPV -123846.88 1290 NO AS NPV IS NEGATIVE 1291 1292 1 IF THE EXPECTED LIFE DECREASES, THEN LESS CASHFLOWS WILL BE AVAILABLE AND SO NPV WILL DECREASE 1293 2 IF WACC INCREASES, THEN ALSO NPV WILL DECREASE 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 STIL O Rea ferences BO 120% _ ODEB OENG 31-10-2019 1 wN H 1a e 9 .