Replacement Analysis
The Everly Equipment Company's flange-lipping machine was purchased 5 years ago for $80,000. It had an expected life of 10 years when it was bought and its remaining depreciation is $8,000 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 $150,000, including installation costs. During its 5-year life, it will reduce cash operating expenses by $50,000 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 $55,000. The firm's tax rate is 35%, and the appropriate cost of capital is 12%.
CF1 | $ |
CF2 | $ |
CF3 | $ |
CF4 | $ |
CF5 | $ |
Calculation of initial cash flow at year 0 | ||||||||
Book value of machine | $40,000 | |||||||
80000-(5*8000) | ||||||||
Sale of machine | $55,000 | |||||||
Gain on sale of machine | $15,000 | |||||||
Tax on sale of machine | 15000*35% | -$5,250 | ||||||
Total cash received | 55000-5250 | $49,750 | ||||||
Purchase price of new machine | -$150,000 | |||||||
Cash outflow at year 0 | 150000-49750 | -$100,250 | ||||||
Cash outflow at year 0 is -$100,250 | ||||||||
Calculation of changes in depreciation | ||||||||
Year | MACRS rate | Depreciable basis | Depreciation (new) | Depreciation (old) | Changes in depreciation expense | Tax shield on depreciation (Changes in depreciation expense*Tax rate) | ||
1 | 33.33% | $150,000 | $49,995 | $8,000 | $41,995 | $14,698.25 | ||
2 | 44.45% | $150,000 | $66,675 | $8,000 | $58,675 | $20,536.25 | ||
3 | 14.81% | $150,000 | $22,215 | $8,000 | $14,215 | $4,975.25 | ||
4 | 7.41% | $150,000 | $11,115 | $8,000 | $3,115 | $1,090.25 | ||
5 | $8,000 | -$8,000 | -$2,800.00 | |||||
Calculation of incremental net cash flows | ||||||||
Year | After tax savings in operating expense (Expense*(1-tax rate)) | Tax shield on depreciation | Total incremental net cash flows | |||||
1 | 32500.0 | $14,698.25 | $47,198.25 | |||||
2 | 32500.0 | $20,536.25 | $53,036.25 | |||||
3 | 32500.0 | $4,975.25 | $37,475.25 | |||||
4 | 32500.0 | $1,090.25 | $33,590.25 | |||||
5 | 32500.0 | -$2,800.00 | $29,700.00 | |||||
Net present value is present value of cash inflow less present value of cash outflow | ||||||||
Calculation of net present value | ||||||||
Year | Incremental net cash flow | Discount factor @ 12% | Present value | |||||
0 | -$100,250 | 1.00000 | -$100,250.00 | |||||
1 | $47,198.25 | 0.89286 | $42,141.29 | |||||
2 | $53,036.25 | 0.79719 | $42,280.17 | |||||
3 | $37,475.25 | 0.71178 | $26,674.14 | |||||
4 | $33,590.25 | 0.63552 | $21,347.21 | |||||
5 | $29,700.00 | 0.56743 | $16,852.58 | |||||
NPV | $49,045.40 | |||||||
The net present value is $49,045 | ||||||||
Since the NPV of the project is positive, Everly should replace the flange lipper. | ||||||||
Replacement Analysis The Everly Equipment Company's flange-lipping machine was purchased 5 years ago for $80,000. It...
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...
The Everly Equipment Company's flange-lipping machine was purchased 5 years ago for $80,000. It had an expected life of 10 years when it was bought and its remaining depreciation is $8,000 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 $130,000, including installation costs. During its 5-year life, it...
Problem 11-13 Replacement Analysis The Everly Equipment Company's flange-lipping machine was purchased 5 years ago for $100,000. It had an expected life of 10 years when it was bought and its remaining depreciation is $10,000 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 $150,000, including installation costs. During...
The Everly Equipment Company's flange-lipping machine was purchased 5 years ago for $50,000. It had an expected life of 10 years when it was bought and its remaining depreciation is $5,000 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 $130,000, including installation costs. During its 5-year life, it...
The Everly Equipment Company's flange-lipping machine was purchased 5 years ago for $90,000. It had an expected life of 10 years when it was bought and its remaining depreciation is $9,000 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 $130,000, including installation costs. During its 5-year life, it...
The Everly Equipment Company's flange-lipping machine was purchased 5 years ago for $70,000. It had an expected life of 10 years when it was bought and its remaining depreciation is $7,000 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 $140,000, including installation costs. During its 5-year life, it...
The Everly Equipment Company's flange-lipping machine was purchased 5 years ago for $50,000. It had an expected life of 10 years when it was bought and its remaining depreciation is $5,000 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 $120,000, including installation costs. During its 5-year life, it...
20. Problem 12.20 (Replacement Analysis) eBook The Darlington Equipment Company purchased a machine 5 years ago at a cost of $90,000. The machine had an expected life of 10 years at the time of purchase, and it is being depreciated by the straight-line method by $9,000 per year. If the machine is not replaced, it can be sold for $15,000 at the end of its useful life. A new machine can be purchased for $180,000, including installation costs. During its...
The Darlington Equipment Company purchased a machine 5 years ago at a cost of $100,000. The machine had an expected life of 10 years at the time of purchase, and it is being depreciated by the straight-line method by $10,000 per year. If the machine is not replaced, it can be sold for $10,000 at the end of its useful life. A new machine can be purchased for $160,000, including installation costs. During its 5-year life, it will reduce cash...
The Darlington Equipment Company purchased a machine 5 years ago at a cost of $90,000. The machine had an expected life of 10 years at the time of purchase, and it is being depreciated by the straight-line method by $9,000 per year. If the machine is not replaced, it can be sold for $5,000 at the end of its useful life. A new machine can be purchased for $180,000, including installation costs. During its 5-year life, it will reduce cash...