Question

You purchased a machine five years ago for $100,000. It has a useful life of 10 years and you depreciate it using straight line depreciation to an expected salvage value at the end of its life of $5,000. It currently has a salvage value of $20,000. You are considering purchasing a new machine for $175,000. The new machine is expected to have a salvage value of $35,000 at the end of its life. It will cost $8,000 to ship the new machine and $7,000 to install. The new machine will require you to maintain an additional $15,000 in inventory. Your marginal tax bracket is 34%. Calculate the initial investment for this machine. The new machine is expected to provide yearly incremental cashflows of $40,000 per year

Answer 1

The old machine was bought 5 years ago.

We are planning to buy the new machine now i.e. 5 years after buying the old machine.

So, we can consider that all transaction related to the new machine will happen at the end of 5th Year.

At the end of 5th Year the salvage value of the old machine is $20,000.

Based on the above information we can calculate the initial investment for the new machine as given in the table below:

	Legend	Formula	5th Year
Old Machine Salvage Value	A		$ 20,000
New Machine Purchase Cost	B		$ (175,000)
Logistics Cost for New Machine	C		$ (8,000)
Installation Cost for New Machine	D		$ (7,000)
Inventory Cost for New Machine	E		$   (15,000)
Net Cash Flow	NCF	=A-B-C-D-E	$ (185,000)

So from the above table we can see that,

Initial investment for the new machine = $185,000