Question

P11-16 (similar to) Question Help Relevant cash flowslong dash—No terminal value   

Central Laundry and Cleaners is considering replacing an existing piece of machinery with a more sophisticated machine. The old machine was purchased 3 years ago at a cost of $45,900​, and this amount was being depreciated under MACRS using a​ 5-year recovery period. The machine has 5 years of usable life remaining. The new machine that is being considered costs $77,000 and requires $4,400 in installation costs. The new machine would be depreciated under MACRS using a​ 5-year recovery period. The firm can currently sell the old machine for $54,600 without incurring any removal or cleanup costs. The firm is subject to a tax rate of 40%. The revenues and expenses​ (excluding depreciation and​ interest) associated with the new and the old machines for the next 5 years are given in the table

New machine Old machine Expenses (excluding depreciation and interest $720,600 720,600 720,600 720,600 720,600 Expenses (excluding depreciation and interest) 5659,000 659,000 659,000 659,000 659,000 Year Revenue $750,900 750,900 750,900 750,900 750,900 Revenue $673,500 675,500 679,500 677,500 673,500

(Table

... contains the applicable MACRS depreciation​ percentages.) Note: The new machine will have no terminal value at the end of 5 years. a. Calculate the initial investment associated with replacement of the old machine by the new one. b. Determine the incremental operating cash inflows associated with the proposed replacement.​ (Note: Be sure to consider the depreciation in year​ 6.) c. Depict on a time line the relevant cash flows found in parts ​(a​) and ​(b​) associated with the proposed replacement decision.

Answer 1

.Campatation ed boek vaheofan ame by drduring sccemulting depreciation Aoemtslated deprecnon-77% ofeo t of tr mythin,(20%-32%-19%-71%) Book al-installed cost of aset-d depeeiation Book value 5900-$32,589-583 341 Teretee, book value ofaid machise S13,31 by detecting bookale trom saeaeweget recapered dpredann Rrcapmeed depeeciaten-sale vae-beok vaue-$459-$325 by detecting installed cet tram the sale vae ve pecapial gai Tax 06 capital gain R4056. $3.480 After tex poceeds oe sale ot modite sale olpe-tax napthred depreciation fter-grooredson sle of mactine-338084 S31.400-$38084 _ $43.316 Calculation of old machine depreciation: calculation of new machine depreciation: Installed cost $81,400 581,400 $81,400 $81,400 $81,400 $81,400 5-Year MACRS % depreciation $16,280 $26,048 45,900 5,900 5,900 45,900 5,900 $4,070 Total 45,900 calculation of old machine: 673,500 $673,500 $673,500 $673,S00 $659,000 $659,000 $659,000 $659,000 less: depreciation 2,295 8,992 12,20S 8,992 $5,800 less: taxes @40% Earnings after tax $8,700 flows (earnings after tax+ 10,903$9,618 Calculation of new machine: less: expense less: depreciation 750,900 $750,900 720,600 $720,600 $16,280 $750,900 $750,900 $750,900 720,600 $720,600 $720,600 9,768 9,768 $4,070 $14,83420,532 $20,532 (S4,070) $8,213 $8,213 (S1,628) $8,90012,319 $12,319 ($2,442) Eanings after tax Incremental operating $2,551 Depreciation) $24,692 $24,366 22,087 $22,087 $1,628 calculation of incremental cashflows: New machine Old machine 24,692 $28,599 $24,366 $22,087 22,08 $1,628 $10,903 $10,903 S9,618 $8,700 $8,700 IS43,31613,789 $17,696 $14,751 13,387 $13,37 $1,628 17,636