Question

The Minot Kit Aircraft Company of​ Minot, North​ Dakota, uses a plasma cutter to fabricate metal aircraft parts for its plane kits. The company currently is using a cutter that it purchased four years ago that has a book value of ​$90,000 and is being depreciated ​$22,500 per year over the next 4 years. If the old cutter were to be sold​ today, the company estimates that it would bring in an amount equal to the book value of the equipment.

The company is considering the purchase of a new automated plasma cutter that would cost ​$360,000 to install and that would be depreciated over the next 4 years toward a​$43,000 salvage value using​ straight-line depreciation. The primary advantage of the new cutter is the fact that it is fully automated and can be run by one operator rather than the three employees that are currently required. The labor savings would be $90,000 per year. The firm faces an income tax rate of 27 percent. At the end of the​ 4-year project both cutters could be sold at their​ end-of-project book value.

P12-31 (similar to) Question Help (Replacement project cash flows) The Minot Kit Aircraft Company of Minot, North Dakota, uses a plasma cutter to fabricate metal aircraft parts for its plane kits company currently is using a cutter that it purchased four years ago that has a book value of $90,000 and is being depreciated $22,500 per year over the next 4 y If the old cutter were to be sold today, the company estimates that it would bring in an amount equal to the book value of the equipment. The company is considering the purchase of a new automated plasma cutter that would cost $360,000 to install and that would be depreciated over the next 4 ye toward a $43,000 salvage value using straight-line depreciation. The primary advantage of the new cutter is the fact that it is fully automated and can be run by o operator rather than the three employees that are currently required. The labor savings would be $90,000 per year. The firm faces an income tax rate of 27 perc At the end of the 4-year project both cutters could be sold at their end-of-project book value. a. What are the differential operating cash flow savings per year during years 1 through 4 for the new plasma cutter? b. What is the initial cash outlay required to replace the existing plasma cutter with the newer model? c. What does the timeline for the replacement project cash flows for years 0 through 4 look like? d. If the company requires a discount rate of 8 percent for new investments, should the plasma cutter be replaced? a. The differential operating cash flow savings per year during years 1 through 3 for the new cutter are $ (Round to the nearest dollar.)

Answer 1

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PVIF AT 8% = 1/(1+r)^n

C W ENG 09:58 31-07-2020 99+ 32 Х H300 . A B с D E F G H K L - . 279 DEPRECIATION OLD CUTTER 22500 280 NOTE 1 281 282 283 NEW CUTTER 79250 (=(360000-43000)/4] 284 NOTE 2 90000 285 BOOK VALUE OF OLD CUTTER SALE VALUE OF OLD CUTTER PROFIT ON SALE AFTER TAX SALVAGE 90000 o 286 287 90000 288 289 290 CALCULATION OF OPERATING CASH FLOW 291 292 SAVINGS IN LABOR 90000 56750 (79250 -22500] 293 294 DEPRECIATION [INCREMENTAL) INCOME BEFORE TAX 295 33250 296 TAX 27% 8977.5 NET INCOME 297 298 24272.5 56750 299 DEPRECIATION [INCREMENTAL] OPERATING CASH FLOW 300 ANS a 81022.5 301 EAC MACRS RELEVANT MI-np-ir BETA LEVERED NPV CCA REPLACEMENT BOND OPTION TO WAIT STEIN indiffEPS EBIT OCF 1 LEA ... +

C W ENG 09:59 31-07-2020 99+ 32 Х H324 . A B с D E F G H K L - . 302 INITIAL CASH OUTLAY 303 COST OF NEW CUTTER 360000 304 LESS: AFTER SALE OF OLD CUTTER 90000 305 ANS b INITIAL CASH OUTLAY 270000 306 307 ANS C YEAR 0 1 2 3 4 308 CF -350000 81022.5 81022.5 81022.5 124022.5 [81022.5 + 43000] 309 310 ANS d DISCOUNT RATE = 8% 311 312 YEAR CF PVIF @ 8% PV OF CF 313 314 A B A*B O 315 -350000 1 -350000.00 316 1 81022.5 75020.83 0.9259 0.8573 2 81022.5 69463.73 317 318 3 81022.5 0.7938 64318.27 319 4 124022.5 0.7350 91160.24 320 NPV = -50036.92 321 322 NO SHOULD NOT BE REPLACED 323 AS NPV IS NEGATIVE 324 EAC MACRS RELEVANT MI-np-ir BETA LEVERED NPV CCA REPLACEMENT BOND OPTION TO WAIT STEIN indiffEPS EBIT OCF 1 LEA ... +