Question

harrington metals inc. purchased a large stamping machine five years ago for $120.000. for simplicity assume that the tax laws at the time permitted straight line depreciation over 10 years and that machinery purchased today can be depreciated straight line over five years. the old machine has not performed well, and management is considering replacing it with a new one that cost $250,000. if the new machine is purchased, it is estimated that the old one can be sold for $50.000. the old machine requires three operators, each of whom carns $250,000 a year require only two operators, each carning the same amount. including all benefits and payroll costs/the new machine is more efficiently designed and will the old and new machines have the following estimated downtime hours and maintenance cost for the next 5-years: year downtime hours (old maching downtime hours (new machine) maintenance expense (old machine) 2 3 100 60 20 $15.000 $20,000 5 128 30 $25,000 30 $30.000 maintenance expense (new machine) warranty in warranty $15,000 $15,000 $15.000 0 $10,000 downtime on the old machine is a major inconvenience and harrington manufacturing managers estimate that every hour of downline costs the company $500 the manufacturer of the replacement machine have said that ilarrington will spend about $15.000 a year as maintenance cost of the new machine and that an average of only 30-hours of downtime a year should be expected. however, they're not willing to guarantee those estimates alter two-year warranty runs out. moreover, the manufacturer ensures that if the downtime exceeds more than 30-hours it will cost only $200 per hour to harrington and manufacturer also guarantee that if downtime cost exceeds $200 per hour they will compensate for the additional amount. the new machine is expected to produce higher quality output than the old one. the result is expected to be better customer satisfaction and possibly more sales in future. management would like to include some benefit for this effect in the analysis, but is unsure of how to quantify it. required: a) estimate the incremental cash flows over the next five years associated with buying the new machine. assume harrington's marginal tax rate is 30% en both revenue and capital gains. b) determine the feasibility of acquiring the new machine using the npv method. ilarrington estimate that project with similar risk involves a cost of capital of 10% c) what changes in niv you will observe if the downtime costs $300 per hour throughout the 5-years working life of the new machine. provide explanation to support your answer