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Save Homework: HW8 Chapter 12 Score: 0 of 16 pts X P12-32 (algorithmic) core HW Score: 39.39%, 26 of 66 pt Question Help (Replacement project cash flows) The Louisiana Land and Cattle Company LLCC) is one of the largest cattle buyers in the country. They have buyers at all the major cattle actions throughout the southeastern part of the US who buy on the company's behall and then have the cattleshipped to Super Springs, Louisiana, where they are sorted by weight and type before shipping off to food lots in the Midwest. The company has been considering the replacement of their actor-trailer rigs with a newer, more fuel efficient feet for some time, and a local Peterbilt dealer has approached the company with a proposal. The proposal would call for the purchase of 10 new rigs at a cost of $70,000 each. The rigs would be depreciated toward a salvage value of $38,000 over a period of 5 years. ILLECC purchase the rigs, it will seltsisting foot of 10 g o the Peterbilt dealer for their current book value of $23.000 per unit. The existing fleet will be fully deprecated in 1 more year but is expected to be serviceable for more years, at which time they would be worth only $5.000 per unit as scrap The new Teet of trucks is much more fuel efficient and will require only $170.000 inful costs compared to $280,000 for the existing fleet. In addition, the new feet of trucks will require minimal maintenance over the next 5 years, equal to an estimated $110,000 compared to almost 370,000 per year that is currently being spent to keep the older et running a. What are the differential operating cash flow savings per year during years through 5 for the new feet? The firm pays tas at a marginal tax rate of 29 percent b. What is the initial cash outlay required to replace the existing tool with newrigs? c. Sketch a timeline for the replacement project cash flows for years through 5 d. ILL&CC requires a discount rate of percent for new investments, should the feet be replaced a. Find the differential operating cash flow savings per year during years 1 through 4 for the new feet (Round to the nearest dollar Cash Flow Value Year 1 $ 234 306 Year 2 $ 301.096 Enter your answer in the answer box and then click Check Answer 3 parts 3 ming Clear All Check Answer

Answer 1

1 Particulars/ Years 2 3 2 Investment cash flow 3 Cost of buying new rigs 4 old rigs sales proceeds |5 Net investment outflow ($700,000.00) $230,000.00 ($470,000.00] Operation cash flow Fuel efficiency savings 9 Maintenance savings | 10 Change in depreciation 11 Change in prolil belore lax 12 Marginal tax @29% 13 Change in profit after tax s110,000.00 $110,000.00 $110,000.00 $260,000.00 $110,000.00 $110,000.00 $260,000.00 $260,000.00 $260,000.00 S260,000.00 $166,000.00 $536,000.00 ($155,440.00) $380,560.00 ($64,000.00) $306,000.00 ($64,000.00) $306,000.00 ($88,740.00) ($64,000.00) $306,000,00 ($64,000.00) S306,000.00 ($88,740.00) $217,260.00 ($88,740.00) $217,260.00 ($88,740.001 S217,260.00 $281,260.00 $217,260.00 14 Increase in çash inflow $214,560.00 $281,260.00 $281,260.00 $281,260.00 16 Terminal cash flow 17 New rigs sales procecds 18 Net tax old rigs proceeds 19 Net terminal cash flow $380,000.00 ($35,500.00) $344,500.00 21 Net cash flow 22 PV factor (a9% 23 PV of cash flow 24 Project NPV ($470,000.00) $214,560.00 0.92 $196,844.04 $281,260.00 $281,260.00 $281,260.00 $625,760.00 0.65 1.00 0.84 0.77 0.71 $406,701.06 ($470,000.00) $236,730.91 $199,251.67 S217,184.33 $786,712.02 25 26 Solution (a) 27 Particulars/ Years 28 Operating cash llow 3. 4 $214,560.00 $281,260.00 $281,260.00 $281,260.00 S281,260.00 30 Solution (b) 31 Initial cash outlay $470,000.00 33 Solutlon (c) 34 Particulars/ Years 35 Project cash flow 3 ($470,000.00) $214,560.00 $281,260.00 S281,260.00 $281,260.00 $625,760.00 37 Solution (d) 38 Since, the project has posilive NPV ol $786,712.02 and hence, Lhe fleet should be replaced

=B1+1 =E1+1 =C1+1 Particulars/ Years Investment cash flow 3 Cost of buying new rigs 4 Old rigs sales proceeds 5 Net investment outflow =D1+1 =F1+1 =-70000*10 =23000*10 I3SUM(B3:B4) 7 Operation cash flow 8 Fuel efficiency savings 9 Maintenance savings 10 Change in depreciation 11 Change in profit before tax 12 Marginal tax @29% |13 Change in profit after tax 14 Increase in cash inflow 110000 110000 110000 110000 110000 260000 |=(B3+G17)/5 =SUM(F8:F10) =-29%*F11 =SUM(F11:F12) =F13-F10 260000 260000 260000 260000 |=(B3+G17)/5+B4 =SUM(C8:C10) =-29%*C11 =SUM(C11:C12) =C13-C10 =(B3+G17)/5 |=SUM(E8:E10) =-29%*E11 =SUM(E11:E12) =E13-E10 =(B3+G17)/5 =SUM(D8:D10) =(B3+G17)/5 |=SUM(G8:G10) =-29%*G11 =-29%*D11 =SUM(G11:G12) =G13-G10 =SUM(D11:D12) =D13-D10 16 Terminal cash flow 17 New rigs sales proceeds 18 Net lax old rigs proceeds =38000*10 )(5(000-*10)*(1-29%)) =SUM(G17:G18) 19 Net terminal cash flow 21 Net cash flow 22 PV factor @9% =B5+B14+B19 =1/1.09 B1 =B21*B22 I=SUM(B23:G23) =D5+D14+D19 =1/1.09^D1 =D21*D22 =F5+F14+F19 =1/1.09^F1 =C5+C14+C19 =E5+E14+E19 =G5+G14+G19 =1/1.09^C1 =1/1.09^G1 =G21*G22 =1/1.09^E1 =E21*E22 23 PV of cash flow =C21*C22 =F21*F22 24 Project NPV 25 26 Solution (a) 27 Particulars/ Years 28 Operating cash flow lo =E27+1 =F14 =F27+1 =B27+1 =C27+1 =D27+1 =C14 =D14 =E14 =G14 30 Solution (b) 31 Initial cash outlay =-B5 33 Solution (c) 34 Particulars/ Years 35 Project cash flow lo =B21 =B34+1 =C21 =D34+1 =E34+1 =F21 =F34+1 =G21 =C34+1 =D21 =E21 37 Solution (d) 38 Since, the project has positive NPV of $786,712.02 and hence, the fleet should be replaced