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Data Table MI (Click on the icon located on the top-right corner of the data table below in order to copy its contents into a ti spreadsheet.) Rounded Depreciation Percentages by Recovery Year Using MACRS for First Four Property Classes 10 years 10% 18% 14% 14% 45% 18% 4 5% 5% 5% 5% 10 Print DoneP11-29 (similar to Question Help Integrative Investment decision Holliday Manufacturing is considering the replacement of an existing machine. The new machine costs $129 million and requires installation costs of $158,000. The existing machine can be sold currently for $183,000 before taxes. It is 2 years old, cost $798,000 new, and has a $383,040 book value and a remaining useful life of 5 years. It was being depreciated under MACRS using a 5-y recovery period EEB and therefore has the final 4 years of depreciation remaining. If it is held for 5 more years, the machines market value at the end of year 5 will be S0. Over its 5-year life, the new machine should reduce operating costs by $358,000 per year. The new machine will be depreciated under MACRS using a 5-year recovery period. The new machine can be sold for $208,000 net of removal and cleanup costs at the end of 5 years. An increased investment in net working capital of $20,000 will be needed to support operations if the new machine is acquired. Assume that the firm has adequate operating income against which to deduct any loss experienced on the sale of the existing machine. The firm has a 8.8% cost of capital and is subject to a 4096 tax rate. a. Develop the net cash flows needed to analyze the proposed replacement. b. Determine the net present value (NPV) of the proposal. c. Determine the internal rate of return (IRR) of the proposal d. Make a recommendation to accept or reject the replacement proposal, and justify your answer. e. What is the highest cost of capital that the firm could have and still accept the proposal? Installed cost of new asset Proceeds from sale of existing machine Tax on sale of existing machine Total after-tax proceeds from sale Increase in net working capital $ Initial investment Enter any number in the edit fields and then click Check Answer 17 Pemaining Clear All Check AnswerP11-29 (similar to) Question Help Integrative Investment decision Holliday Manufacturing is considering the replacement of an existing machine. The new machine costs $1.29 million and requires installation costs of $158,000. The existing machine can be sold currently for $183,000 before taxes. It is 2 years old, cost $798,000 new, and has a $383,040 book value and a remaining useful life of 5 years. It was being depreciated under MACRS using a 5-year recovery period anc therefore has the final 4 years of depreciation remaining. If it is held for 5 more years, the machines market value at the end of year 5 will be S0. Over its 5-year life, the new machine should reduce operating costs by $358,000 per year. The new machine will be depreciated under MACRS using a 5-year recovery period. The new machine can be sold for $208,000 net of removal and cleanup costs at the end of 5 years. An increased investment in net working capital of $20,000 will be needed to support operations if the new machine is acquired. Assume that the firm has adequate operating income against which to deduct any loss experienced on the sale of the existing machine. The firm has a 8.8% cost of capital and is subject to a 40% tax rate a. Develop the net cash flows needed to analyze the proposed replacement. b. Detine the net present value (NPV) of the proposal. c. Determine the internal rate of return (IRR) of the proposal. d. Make a recommendation to accept or reject the replacement proposal, and justify your answer. e. What is the highest cost of capital that the firm could have and still accept the proposal? a. Develop the relevant cash flows needed to analyze the proposed replacement. Calculate the initial investment: (Round to the nearest dollar.) Cost of the new machine Installation cost Installed cost of new asset Proceeds from sale of existing machine $ Enter any number in the edit fields and then click Check Answer Clear Al Check Answer remaining

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Answer #1

a)cost of new machine= 1,290,000
Installed cost of new asset = 158,000
Proceeds from sales of existing =183000
Tax on sale of exist machine=tax rate*(market-book value)=40%*(183000-383040)=-80016
Total after tax proceeds sale=183000-(-80016)=263,016
Increase in new work capt =20,000
iniital investment=sum of all above
=-1,731,016

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