Question

Taylor Toy Corp Ch 11 (11-9) Taylor Toy Corp. is considering the replacement of it injection molding machine. It is 2 years old but new technology has it considering the newest model. • The old (current) machine was acquired 2 years ago and is being depreciated on a straight line basis over 8 years (6 years remaining). The annual depreciation expense is $350 per year, and its current book value is $2,100. It can be sold for $2,500 today. If the machine is not replaced, it is expected to be sold for $500 at the end of its remaining life (6 yrs). The new, replacement machine will cost $8,000. It is expected to be used for 6 years, and is expected to be sold for $800 then. It will be depreciated using MACRS (5-year class with 12 year convention). The new machine is expected to support an increase in sales by $1,000 per year, and with its improved electrical efficiency, it should reduce operating expenses by $1,500 per year. Inventories will need to increase by $2,000 and Account payable will increase by $500. The company's tax rate is 40%. Taylor Toy's Cost of Capital is 15%, which is the appropriate Hurdle Rate for this project. • • • • Using a blank workbook (not a template ...), evaluate this project: a. Present the cash flows b. Calculate the evaluation measures. c. Should Cookeville Technical Productions replace the machine?

Answer 1

amount Solution Given that , Annual depreciation expenser = $350 current book Value - $ 2100 O sold = $9.500 particulars Bepreciation per year on. old machine ( Noten) 350 Book value 2100 sale price 2500 gain'on sale (4500 - 2400) = 400 Tan on gain (400 x 40%) [160] Cost of New Machine 8000 less - sale value of old machine 2500 Addi-tau on sale of old machine 160 Add:- Working Capital 2000–4500 1500 7160 lintial cash flow at year = -7160 [ 7160 is the outflow thats way is negative) | Depreciation | Depreciation I change in year I New 2 Machine of Machine depreciation (ALB) 20% 1600 350 1250 32% 2560 350 1520 19% 1170 350 GIO 960 350 530 880 480 350 Note: 0 Rates 2210 le-among 19% CScanned with CanScanner

Total increase in earnings =1000 + 1500 =12500 incremental cash flows : Earning (1-7)+ change in depreciation xt year particulary amount I 2500X(1-0.4+1250x (0.4) 5.2000 2 2500X(1-04)+2210X(0.4) -→ 2384 3 2500X (1-0.4771170*(0,4) + 1968 4 2500+ (1-0,44 610X(0:4) 4 1744 5 2500X (1-016) +530x1016) -> 1712 6 2500*(1-0,4)+ 130x10.45 1552 calculate of NPV :- year Cashflow pufactor @157 pv of cfat. 0 -7160 -7160 2000 0,8696 1739.13 2384 017561 1802 65 1968 0.6575 1293.99 1744 0.5718 997.14 1712 0.4972 851.17 3232 0:4323 1397.28 * (ว 3M 0 31552 - 500X (1-014)+800 x(1-0.4+1500 [Nov =921136) - 500 is salvage value of old machine, if sold at the end of 6 year, 800 is salvage value of new machine. after ture Salvage is 800x11-0.4 as book value is Zero [1500 recovery of working Capital] . AS NPV is positive, Replacement should be done CS scanned with Camscaniig he End =