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The Bigbee Bottling Company is contemplating the replacement of one of its betting machines with a newer and more efficient o

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Answer #1

Solution:

Solving first four questions as HOMEWORKLIB's guidelines:

1.a)Calculation of Initial cash outlay

=Price of new machine-after tax sale proceed of old machine

=$1150,000-$235,000

=$915,000

b)Statement showing depreciation allowances:

Year Depreciation allowance,New(Price*rate) Depreciation allowance,Old(given) Change in Depreciation
1 $1150,000*0.20=$230,000 $120,000 $110,000
2 $1150,000*0.32=$368,000 $120,000 $248,000
3 $1150,000*0.19=$218,500 $120,000 $98,500
4 $1150,000*0.11=$126,500 $120,000 $6,500
5 $1150,000*0.06=$69,000 $120,000 -$51000

c)Calculation of Incremental net cash flows:

Year 1 2 3 4 5
Annual saving $210,000 $210,000 $210,000 $210,000 $210,000
Less:Incremental Depreciation $110,000 $248,000 $98,500 $6,500 -$51000
Net Incremental saving $100,000 -$38,000 $111,500 $203,500 $261,000
Less: Tax @35% $35,000 $0 $39,025 $71,225 $91,350
Saving after tax $65000 -$38,000 $72,475 $132,275 $169,650
Add:Depreciation $110,000 $248,000 $98,500 $6,500 -$51000
Add:Salvage Value of machine 0 0 0 0 $120,000
Net Incremental Cash flows $175,000 $210,000 $170,975 $138,775 $238,650

d)Calculation of Net present value of machine(NPV):

NPV=Present value of Net Incremental Cash flows-Initial cash outlay

Present value of Net Incremental Cash flows is;

=175,000/(1+0.12)^1+210,000/(1+0.12)^2+170,975/(1+0.12)^3+138,775/(1+0.12)^4+238,650/(1+0.12)^5

=$668,967.78

NPV=$668,967.78-$915,000

=-246,032.22

Since the NPV of machine is negative,hence the firm should not purchase the machine.

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