Question

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 $650,000 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 $250,000. The old machine is being depreciated by $130,000 per year, using the straight-line method.

The new machine has a purchase price of $1,100,000, an estimated useful life and MACRS class life of 5 years, and an estimated salvage value of $140,000. 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 $240,000 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

H w ENG 08-19 31-07-2020 199+ 3 28 X IN1407 IL IM IN IO IP IQ IR IS IT IU IK 1407 BIGBEE 1408 note 1409 1410 1411 1412 1413 depreciation per year on old machine book value = sale price = Loss on sale = tax saving on loss on sale = 130000 650000 250000 400000 140000 35% tax 1414 cost of new machine sale value of old machine tax saving on sale of old machine working capital 1100000 250000 140000 710000 intial cash flow at year 0 -710000 year 1415 less 1416 less 1417 add 1418 1419 1420 A 1421 1422 note 1423 1424 1425 1426 1427 1428 1429 1430 1 2 depreciation cost = 1100000 old machine change in rates depreciation ($) depreciation depreciation А B A-B 20.00% 220000 130000 90000 32.00% 352000 130000 222000 19.00% 209000 130000 79000 12.00% 132000 130000 2000 11.00% 121000 130000 -9000 3 4 5 EAC MACRS RELEVANT Ml-np-ir BETA LEVERED NPV CCA REPLACEMENT BOND BOND OPTION TO WAIT | STEIN indiffEPS EBIT OCF 1 LEA ... o

H w ENG 09:52 31-07-2020 199+ 32 х IR1452 IT IU 66000 IK IL IM IN IO IP IQ IR IS 1432 b TOTAL INCREASE IN EARNINGS = 240000 1433 incremental net cash flows 1434 year EARNINGS(1-t) + change in depreciation*(t) 1435 1 240000*(1-0.35) + 90000*(0.35) 187500 1436 2 240000*(1-0.35) + 222000*(0.35) 233700 1437 3 240000*(1-0.35) + 79000*(0.35) 183650 1438 4 240000*(1-0.35) + 2000*(0.35) 156700 1439 5 240000*(1-0.35) - 9000*(0.35) + AFTER TAX SALVAGE 266950 SEE NOTE FOR AFTER TAX SALVAGE] 1440 1441 calcualtion of NPV 1442 year cash flow pv factor @ 12% pv of cfat NOTE 1443 0 -710000 1 -710000 BOOK VALUE OF NEW MACHINE 1444 1 187500.00 0.8929 167410.71 1100000 X 6% 1445 2 233700.00 0.7972 186304.21 SALVAGE VALUE 1446 3 183650.00 0.7118 130718.44 PROFIT ON SALE 1447 4 156700.00 0.6355 99585.68 TAX ON PROFIT ON SALE 35% 1448 5 266950.00 0.5674 151474.60 AFTER TAX SALVAGE VALUE 1449 C NPV 25494 [140000 - 25900) 1450 1451 D AS NPV IS POSITIVE, REPLACEMENT SHOULD BE DONE 1452 NEW MACHINE SHOULD BE PURCHASED 1453 e 1454 1 IF THE EXPECTED LIFE DECREASES, THEN LESS CASHFLOWS WILL BE AVAILABLE AND SO NPV WILL DECREASE 1455 2 IF WACC INCREASES, THEN ALSO NPV WILL DECREASE ... EAC MACRS RELEVANT Ml-no-ir BETA LEVERED NPV CCA REPLACEMENT BOND BOND OPTION TO WAIT | STEIN indiffEPS EBIT OCF 1 LEA ... 140000 74000 25900 114100