Question

9) You are considering to replace an old machine which was purchased 2 years ago at $120,000. The old machine is still working and has four more years of useful life. If you sell the old mahcine today, you can sell at $40,000. The new machine costs you $160,000 and has a life of four years. The new machine is more efficient, therefore the operting expenses (excluding depreciation) will be reduced by S70,000 per year. Replacing old with new one reduces the inventory level by $10,000. The old machine will be worthless after four years (from now) whereas the new machine could be scrapped at $15.000. Use straight-line method for deprecation. The tax rate is 40% and required rate of return is 12%. a. Estimate the Initial cash flow. [4 marks] b. Estimate the Operating Cashflows from Year 1 to Year 4. [6 marks] c. Estimate the Final year cash flows (including terminal cash flows). [5 marks] d. Compute the NPV of the incremental cash flows and write your recommandation. [4+1 marks]

Answer 1

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W @ vor 1x 3 ENG 1 03:34 = 21-03-2020 ... o X S T U V 145 147 150 153 5165 - x fix NO a R 143 DEPRECIATION ON 144 OLD MACHINE 20000 [120000/6] NEW MACHINE 40000 [160000/4] 146 NOTE BOOK VALUE OF OLD MACHINE 80000 148 SALVAGE VALUE OF OLD MACHINE 40000 149 LOSS ON SALE OF MACHINE 40000 TAX CREDIT ON LOSS ON SALE 16000 [40000 X 40%] 151 152 CALCULATION OF NET CASH OUTFLOW COST OF NEW MACHINE 160000 154 LESS : SALVAGE OF OLD MACHINE 40000 LESS : TAX CREDIT ON LOSS ON SALE 16000 156 LESS : REDUCTION IN INVENTORY 10000 157 ANS a : NET CASH OUTFLOW 94000 158 159 CALCULATION OF OPERATING CASH FLOW 160 REDUCTION IN OPERATING EXPENSES 70000 161 DEPRECIATION (INCREMENTAL] 20000 [40000 - 20000] 162 EBT 50000 TAX @ 40% 20000 164 NET INCOME 30000 165 DEPRECIATION 20000 166 ANS: b OCF 50000 1 ... HPR GMAM EAC MACRS RELEVANT MI-np-ir NPV BETA LEVERED REPLACEMENT 155 163 BOND OPTION TO WAIT | STEIN indiffEPS EBIT LEASE SLM GOLF ... Đ : 1

W @ vor 1x 3 ENG 1 03:34 = 21-03-2020 ... o X fix S189 : x No P Q R S T U V 167 168 169 170 171 172 173 FINAL YEAR CASH FLOW OCF AFTER TAX SALVAGE VALUE WORKING CAPITAL RECOVERY FINAL YEAR CASH FLOW 50000 9000 (15000*(1-0.40)] -10000 49000 ANS :C 174 175 YEAR 0 176 177 178 179 180 w NP PV FACTOR CF AT 12% PV OF CF A B A*B -94000 -94000.00 50000 0.89286 44642.86 50000 0.79719 39859.69 50000 0.71178 35589.01 49000 0.63552 31140.39 NPV = 57231.95 181 4 ANS:d : AS NPV IS POSITIVE, WE SHOULD REPLACE IT 182 183 184 185 186 187 188 189 190 ... HPR GMAM EAC MACRS RELEVANT Ml-np-ir NPV BETA LEVERED REPLACEMENT BOND OPTION TO WAIT STEIN indiffEPS EBIT LEASE SLM GOLF ... + : TIN