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A company currently uses a machine that was purchased 2 years ago. This machine is being depreciated on a straight-line basis and has 6 years of life remaining. Its current book value is $2,100 and it can be sold for S2,500 at this time. Thus, the annual Hepreciation expense is S2,100/6-S350 per year. If the old machine is not replaced, it could be sold for S500 at the end ofits useful life The company is offered a replacement machine which has a cost of S8,000, an estimated useful life of 6 years, and an estimated salvage value of S800. This machine falls into the MACRS 5-year class, so the applicable depreciation rates are: 20%, 32%, 19%, 12%. 11%, and 6%. The replacement machine would permit an output expansion, so sales would rise by S1,000 per year; even so, the machines much greater efficiency would cause operating expenses to decline by S1,500 per year. The new machine would require that inventories be increased by S2,000, but accounts payable would also increase by $500. The companys marginal tax rate is 40%, and its WACC is 15%. Should the company replace the old machine?

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Home nert Page Layout Formulas Data Review View dd-Ins s Cut ta copy ▼ E AutoSum ー E ゴWrap Text в 1 프 . Ej-., Δ. : rーー 逻锂函Merge & Center. $, % , 弼,8 Conditional Format eCell Insert Delete Format Sort &Find & Format Painter Formatting as Table Styles2 Clear Clipboard FU62 FT Alignment Number Cells Edting FU FV FW FX FY FZ GB GC GD GE GF 350 2100 2500 400 160 56 57 58 59 60 61 62 63 64 65 depreciation per year on old machine book value = sale price- gain on sale 2500-2100 tax on gain- note 40% of 400 ess add add cost of new machine sale value of old machine tax on sale of old machine working capital (2000-1500) 8000 2500 160 1500 7160 67 68 69 70 71 72 73 intial cash flow at year 0 7160 커 | IRRnpv , RATION PBP ARR . external rate . MIRR NpV IRR : REPLACEMENT S / HPR GMAM , EAC MACRS RATIOCASHBUDGET wacc . BOND EPS EBIT- REPLACEMENT, STat ▶ 06:01 06-01-2019Home nert Page Layout Formulas Data Review View dd-Ins s Cut aCopy E AutoSum ー E ゴWrap Text в 1 프 . Ej-., Δ. : rーー 逻锂函Merge & Center. $, % , 弼,8 Conditional Format eCell Insert Delete Format Sort &Find & 2 ClearFe Select Edting Format Painter Formatting, as Table w styles. ▼ ㆆ ▼ Clipboard FW88 FT Alignment Number FV FX FZ GB GC GD depreciation new machine rates old machine change in depreciation depreciation 70 note year depreciation ($) 72 73 74 75 76 A-B 20.00% 32.00% 19.00% 12.00% 11.00% 6.00% 1600 2560 1520 960 880 480 350 350 350 350 350 350 1250 2210 1170 610 530 130 4 78 79 80 6 TOTAL INCREASE IN EARNINGS 1000 +1500 2500 ncremental net cash flows yearEARNINGS(1-t) change in depreciation*(t) 82 83 84 85 86 87 1 2500*(1-0.4)1250 (0.4) 2 2500 (1-0.4)2210*(0.4) 3 2500* (1-0.4) 1170 (0.4) 4 2500*(1-0.4) 610 (0.4) 5 2500*(1-0.4) +530 (0.4) 6 2500*(1-0.4) 130*(0.4) . MIRR NpV IRR : REPLACEMENT S / HPR GMAM , EAC MACRS 2000 2384 1968 1744 1712 1552 커 | IRRnpv , RATION PBP ARR . external rate RATIOCASHBUDGET wacc . BOND EPS EBIT- REPLACEMENT, STat ▶ 06-01-2019Home nert Page Layout Formulas Data Review View dd-Ins Cut E AutoSum ー E ゴWrap Text aCopy в 1 프 . Ej-., Δ. : rーー 逻锂函Merge & Center. $, % , 弼,8 Conditional Format eCell Insert Delete Format Sort &Find & Format Painter Formatting as Table Styles2 Clear Clipboard FY103 FW Alignment Number Cells Edting FX FY FZ GA GB GC GD GF GH GI 91 92 93 94 95 96 97 98 calculation of NPV cash floww 0 year pv factor @ 15% pv of cfat -7160.00 000.00 2384.00 1968.00 1744.00 1712.00 3232.00 0.8696 0.7561 0.6575 0.5718 0.4972 0.4323 7160 1739.13 1802.65 1293.99 997.14 851.17 1397.28 4 6 100 101 102 C 103 104 105 106 107 108 109 1552-500 1-0.4) 800 (1-0.4)+ 1500 (500 IS SALVAGE VALUE OF OLD MACHINE, IF SOLD AT THE END OF 6 YEARS) (800 is salvage of new machine, after tax salvage is 800* (1-0.40) as book value is zero) NPV 921.36 (1500 recovery of working capital) NPV IS POSITIVE, REPLACEMENT SHOULD BE DONE 커 | IRRnpv , RATION PBP ARR . external rate . MIRR NpV IRR REPLACEMENT S / HPR GMAM , EAC MACRS RATIOCASHBUDGET wacc : BOND CEPS EBIT- REPLACEMENT, STats | | |- 06-01-2019

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