Question

Replacement Analysis The Everly Equipment Company's flange-lipping machine was purchased 5 years ago for $55,000. It had an expected life of 10 years when it was bought and its remaining depreciation is $5,500 per year for each year of its remaining life. As older flange-lippers are robust and useful machines, this one can be sold for $20,000 at the end of its useful life. A new high-efficiency digital-controlled flange-lipper can be purchased for $160,000, including installation costs. During its 5-year life, it will reduce cash operating expenses by $40,000 per year, although it will not affect sales. At the end of its useful life, the high- efficiency machine is estimated to be worthless. MACRS depreciation will be used, and the machine will be depreciated over its 3-year class life rather than its 5-year economic life, so the applicable depreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%. The old machine can be sold today for $50,000. The firm's tax rate is 35%, and the appropriate cost of capital is 14%. a. If the new flange-lipper is purchased, what is the amount of the initial cash flow at Year O? Round your answer to the nearest dollar. Cash outflow, if any, should be indicated by a minus sign.

Answer 1

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projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Data Review View Add-Ins Formulas - 2x 11 pt General AA = = = A Wrap Text Merge Merge & Center - Center Σ AutoSum : A Fill 2 Sort & m Find & SF $ % % , 4:0 .00 :.: Insert Delete Format Conditional Format Formatting as Table Styles Cell Styles Clear Select Filter Editing Alignment Number Cells File Home Insert Page Layout % Cut Calibri Ea Copy Paste Format Painter BIU - D Clipboard Font EY856 Fax 2 EU EV EW 856 857 EX E Y EZ EZ FA FB FC FD FE FE FG 858 859 860 861 note 862 863 everly equipment depreciation per year on old machine book value = 55000 - (5 x 5500) = sale price = gain on sale = tax on gain = 35%*22500 5500 27500 50000 22500 7875 864 865 866 867 868 869 less add cost of new machine sale value of old machine tax on sale of old machine 160000 50000 7875 117875 870 871 872 873 a 874 intial cash flow at year 0 -117875 H invest, EAA MIRR NPV IRR REPLACEMENT S HPR GMAM EAC MACRS LEASE wacc REPLACEMENT BOND I RRnpvbetaPVFVRATION PBP ARR ferences STEIN indiffEPS EBIT RATIOCAT BOU 130% -_ Rea 0 ELEB * * OENG 18-10-2019

projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Data Review View Add-Ins File Home Insert Page Layout Formulas - 2x % Cut pt General Wrap Text Merge & Center - Σ AutoSum : A Fill 2 m Sort & Find & $ % , :.: Conditional Format Formatting as Table Styles Cell Styles Insert Delete Format Clear Filter Editing Select Alignment Number Cells EY EZ FA FB FC FD FE FE FG Calibri 11 AA = = = E Copy Paste Format Painter BI U D- DA Clipboard Font FD883 for EU EV EWEX 874 875 b note year depreciation 876 rates 877 878 1 33.33% 879 44.45% 880 3 14.81% 881 7.41% cost = 160000 old machine change in depreciation ($) depreciation depreciation A-B 53328 5500 47828 71120 5500 65620 23696 5500 18196 11856 5500 6356 5500 -5500 882 883 884 885 886 887 888 889 890 891 892 C incremental net cash flows year savings(1-t) + change in depreciation*(t) 1 40000*(1-0.35) + 47828*(0.35) 2 40000*(1-0.35) +65620*(0.35) 3 45000*(1-0.35) + 18196*(0.35) 4 45000*(1-0.35) + 6356*(0.35) 5 45000*(1-0.35) + (-5500)*(0.35) + AFTER TAX SALVAGE 42740 48967 35619 31475 14325 (20000 IS SALVAGE VALUE OF OLD MACHINE, IF SOLD AT THE E (SO IT REPRESENTS AN OPPORTUNITY COST & HENCE DEDUCTE year cash flow I RRnpvbetaPVFVRATION PBP ARR invest, EAA ferences pv factor @ 14% pv of cfat MIRR NPV IRR REPLACEMENT S HPR GMAM H EAC MACRS LEASE wacc REPLACEMENT BOND STEIN indiffEPS EBIT RATIOCAT BOU 130% Rea _ O _ + ELEB * * OENG 18-10-2019

projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Data Review View Add-Ins File Home Insert Page Layout Formulas - 2x % Cut Σ AutoSum : A Fill 2 m Sort & Find & :.: Conditional Format Formatting as Table Styles Cell Styles Insert Delete Format Clear Filter Editing Select Cells FA FB FC FD FE FE FG Calibri 11 AA = = = pt Wrap Text General E Copy Paste Format Painter BI U D- DA Merge & Center - $ % , Clipboard Font Alignment Number FD903 - five EU EV EW EX EY EZ 892c year cash flow pv factor @ 14% pv of cfat 893 0 -117875 1 -117875 894 42740 0.8772 37491 895 48967 0.7695 37679 896 35619 0.6750 24042 897 31475 0.5921 18635 898 14325 0.5194 7440 899 u WNO 900 901 NPV 7412 902 YES REPLACE AS NPV IS POSITIVE 903 904 905 906 907 908 909 910 H invest, EAA MIRR NPV IRR REPLACEMENT S HPR GMAM EAC MACRS LEASE wacc REPLACEMENT BOND I RRnpvbetaPVFVRATION PBP ARR ferences STEIN indiffEPS EBIT RATIOCAT BOU 130% -_ Rea 0 ELEB * * OENG 18-10-2019