I am quite pressed for time! Can someone help me find this solution? Life of new machine = 3 years
Homework Answers
Answer:
a)
| Step 1: | Incrimental initial flow | |
| a)the cost of new asset | $ 54,000.00 | |
| Add: | working capital on new asset | $ - |
| Out flow | $ 54,000.00 | |
| Less: | Salvage value of old asset after taxation today | $ 18,000.00 |
| Less: | Recapture of WC on old asset | $ - |
| Incremental flow | $ 36,000.00 |
| Salvage value of old asset | $ 18,000.00 |
| Book value after 2 years | 30000 |
| Profit / Loss on sale | $ (12,000.00) |
b)
| Step 2: | Incremental inbetween flow | |||
| a) Incremental operation CFAT | 1 | 2 | 3 | |
| Saving in cash operating expenses | $ 25,000.00 | $ 25,000.00 | $ 25,000.00 | |
| New Machine Depreciation | $ 18,000.00 | $ 18,000.00 | $ 18,000.00 | |
| Old Machine Depreciation | $ 10,000.00 | $ 10,000.00 | $ 10,000.00 | |
| Less incremental depreciation | $ 8,000.00 | $ 8,000.00 | $ 8,000.00 | |
| Incremental Profit Before Tax | $ 17,000.00 | $ 17,000.00 | $ 17,000.00 | |
| Less Income tax @ 25% | $ 4,250.00 | $ 4,250.00 | $ 4,250.00 | |
| Incremental Profit After Tax | $ 12,750.00 | $ 12,750.00 | $ 12,750.00 | |
| Add Incremental depreciation | $ 8,000.00 | $ 8,000.00 | $ 8,000.00 | |
| Incremental CFAT | $ 20,750.00 | $ 20,750.00 | $ 20,750.00 | |
| b) Incremental adjustment of working capital | $ 5,000.00 | $ 5,000.00 | $ 5,000.00 | |
| Net Incremental Cash flow after tax | $ 25,750.00 | $ 25,750.00 | $ 25,750.00 |
c)
| Step 3: | Incremental terminal flow | |
| Salvage value of new asset after taxation | $ 6,000.00 | |
| Add Recapture of working capitla on new asset | $ - | |
| Less salvage value of old asset after taxation -terminal flow | $ - | |
| Less Recapture of WC on old asset | $ - | |
| Incremental Terminal flow | $ 6,000.00 |
| Sales Value | 8,000.00 |
| Book Value | 0 |
| Profit | 8,000.00 |
| Tax @ 25% | 2,000.00 |
d)
NPV of the replacement project is +$26,738
ABC Should replace the old machine with new machine since NPV of the replacement decision is positive.
Consolidation of Step 1 to Step 3
| Year | CFAT | PVF @ 15% | DCF |
| 0 | $ (36,000.00) | 1 | $ (36,000.00) |
| 1 | $ 25,750.00 | 0.870 | $ 22,391.30 |
| 2 | $ 25,750.00 | 0.756 | $ 19,470.70 |
| 3 | $ 25,750.00 | 0.658 | $ 16,931.04 |
| 3 | $ 6,000.00 | 0.658 | $ 3,945.10 |
| Present Value of Inflow = | $ 62,738.14 | ||
| Present Value of Outflow = | $ 36,000.00 | ||
| NPV = PVI - PVO | 62,738.14-36,000 | ||
| NPV = | $ 26,738.14 |
e)
ABC should replace the machine since NPV of the project is positive.
| Step 2: | Incremental inbetween flow | |||
| a) Incremental operation CFAT | 1 | 2 | 3 | |
| Saving in cash operating expenses | $ 15,300.00 | $ 15,300.00 | $ 15,300.00 | |
| New Machine Depreciation | $ 18,000.00 | $ 18,000.00 | $ 18,000.00 | |
| Old Machine Depreciation | $ 10,000.00 | $ 10,000.00 | $ 10,000.00 | |
| Less incremental depreciation | $ 8,000.00 | $ 8,000.00 | $ 8,000.00 | |
| Incremental Profit Before Tax | $ 7,300.00 | $ 7,300.00 | $ 7,300.00 | |
| Less Income tax @ 25% | $ 1,825.00 | $ 1,825.00 | $ 1,825.00 | |
| Incremental Profit After Tax | $ 5,475.00 | $ 5,475.00 | $ 5,475.00 | |
| Add Incremental depreciation | $ 8,000.00 | $ 8,000.00 | $ 8,000.00 | |
| Incremental CFAT | $ 13,475.00 | $ 13,475.00 | $ 13,475.00 | |
| b) Incremental adjustment of working capital | $ 5,000.00 | $ 5,000.00 | $ 5,000.00 | |
| Net Incremental Cash flow after tax | $ 18,475.00 | $ 18,475.00 | $ 18,475.00 |
| Year | CFAT | PVF @ 15% | DCF |
| 0 | $ (36,000.00) | 1 | $ (36,000.00) |
| 1 | $ 18,475.00 | 0.870 | $ 16,065.22 |
| 2 | $ 18,475.00 | 0.756 | $ 13,969.75 |
| 3 | $ 18,475.00 | 0.658 | $ 12,147.61 |
| 3 | $ 6,000.00 | 0.658 | $ 3,945.10 |
| Present Value of Inflow = | $ 46,127.68 | ||
| Present Value of Outflow = | $ 36,000.00 | ||
| NPV = PVI - PVO | 46,127.68-36,000 | ||
| NPV = | $ 10,127.68 |
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