Question

REPLACEMENT ANALYSIS

The Bigbee Bottling Company is contemplating the replacement of one of its bottling machines with a newer and more efficient one. The old machine has a book value of $550,000 and a remaining useful life of 5 years. The firm does not expect to realize any return from scrapping the old machine in 5 years, but it can sell it now to another firm in the industry for $235,000. The old machine is being depreciated by $110,000 per year, using the straight-line method.

The new machine has a purchase price of $1,200,000, an estimated useful life and MACRS class life of 5 years, and an estimated salvage value of $120,000. The applicable depreciation rates are 20%, 32%, 19%, 12%, 11%, and 6%. It is expected to economize on electric power usage, labor, and repair costs, as well as to reduce the number of defective bottles. In total, an annual savings of $210,000 will be realized if the new machine is installed. The company's marginal tax rate is 35%, and it has a 12% WACC.

1. What initial cash outlay is required for the new machine? Round your answer to the nearest dollar. Negative amount should be indicated by a minus sign.
   $
   
2. Calculate the annual depreciation allowances for both machines and compute the change in the annual depreciation expense if the replacement is made. Round your answers to the nearest dollar.

   Year	Depreciation Allowance, New	Depreciation Allowance, Old	Change in Depreciation
   1	$	$	$
   2
   3
   4
   5

3. What are the incremental net cash flows in Years 1 through 5? Round your answers to the nearest dollar.

   Year 1	Year 2	Year 3	Year 4	Year 5
   $	$	$	$	$

4. Should the firm purchase the new machine?
   -Select-Yes Or No
   
   Support your answer. The input in the box below will not be graded, but may be reviewed and considered by your instructor.
   
5. In general, how would each of the following factors affect the investment decision, and how should each be treated?
   1. The expected life of the existing machine decreases.

   The input in the box below will not be graded, but may be reviewed and considered by your instructor.

   2. The WACC is not constant, but is increasing as Bigbee adds more projects into its capital budget for the year.

   The input in the box below will not be graded, but may be reviewed and considered by your instructor.

Answer 1

­SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

03:27 @VD a 1x 2 ENG 22-03-2020 27 : FV X EW for FX FY FZ GA GB GC GD GEGF GG BIGBEE note GD1421 - 1414 1415 1416 1417 1418 1419 1420 depreciation per year on old machine book value = sale price = Loss on sale = tax saving on loss on sale = 110000 550000 235000 315000 110250 35% tax 14211 1200000 less cost of new machine sale value of old machine tax saving on sale of old machine working capital 235000 110250 less add 854750 A intial cash flow at year o -854750 1422 1423 1424 1425 1426 1427 1428 1429 1430 1431 1432 1433 1434 1435 b year depreciation rates 20.00% 32.00% 19.00% 12.00% 11.00% cost = 1200000 old machine change in depreciation ($) depreciation depreciation A-B 240000 110000 130000 384000 110000 274000 228000 110000 118000 144000 110000 34000 132000 110000 22000 1436 1437 ... RELEVANT MI-np-ir NPV BETA LEVERED REPLACEMENT BOND OPTION TO WAIT STEIN indiffEPS EBIT LEASE SLM GOLF IRR MACRS HAMADA ...

VO (1x WE - ENG 03:27 ENG 22.03.2000 E T - x FW FV FZ GA GB GC GD GE GF GG CA GD1462 I 1439 1440 1441 1442 1443 1444 1445 1446 1447 = fx EN FY TOTAL INCREASE IN EARNINGS = 210000 incremental net cash flows year EARNINGS(1-t) + change in depreciation *(t) 1 210000*(1-0.35) + 130000*(0.35) 2 210000*(1-0.35) + 274000*(0.35) 3 210000*(1-0.35) + 118000*(0.35) 4 210000*(1-0.35) + 34000*(0.35) 5 210000*(1-0.35) + 22000*(0.35) + AFTER TAX SALVAGE 182000 232400 177800 148400 247400 (SEE NOTE FOR AFTER TAX SALVAGE] 1448 NOTE AFTER TAX SALVAGE VALUE OF NEW MACHINE BOOK VALUE OF MACHINE SALVAGE VALUE OF MACHINE PROFIT ON SALE OF MACHINE TAX ON PROFIT ON SALE AFTER TAX SALAVGE VALUE 72000 [1200000 X 6%] 120000 A 48000 16800 B 103200 A-B d 1449 1450 1451 1452 1453 1454 1455 1456 1457 1458 1459 1460 1461 1462 calcualtion of NPV year cash flow pv factor @ 12% pv of cfat -854750 -854750 1 182000.00 0.8929 162500.00 232400.00 0.7972 185267.86 177800.00 0.7118 126554.53 148400.00 0.6355 94310.88 247400.00 0.5674 140381.40 MI-np-ir NPV BETA LEVERED REPLACEMENT BOND OPTION TO WAIT STEIN indiffEPS EBIT w NPO u ... RELEVANT LEASE SLM GOLF IRR MACRS HAMADA ... Đ TIN

03:28 © V D C Ax 2 ENG 23-03-2020 27 x FW fx FX FY FY EZ GA GB GC GD GE GF GG GA calcualtion of NPV year cash flow pv factor @ 12% pv of cfat -854750 -854750 1 182000.00 0.8929 162500.00 232400.00 0.7972 185267.86 177800.00 0.7118 126554.53 148400.00 0.6355 94310.88 247400.00 0.5674 140381.40 u Awn FW1470 - - FV 1454 1455 1456 1457 1458 1459 1460 1461 1462 1463 1464 1465 1466 1467 1468 1469 1470 1471 1472 1473 1474 1475 -145735.33 NPV AS NPV IS NEGATIVE NO 1 IF THE EXPECTED LIFE DECREASES, THEN LESS CASHFLOWS WILL BE AVAILABLE AND SO NPV WILL DECREASE 2 IF WACC INCREASES, THEN ALSO NPV WILL DECREASE 1476 1477 AA ... RELEVANT MI-np-ir NPV BETA LEVERED REPLACEMENT BOND OPTION TO WAITSTEIN indiffEPS EBIT LEASE SLM GOLF IRR MACRS HAMADA ... Đ TI