Question

16. Problem 12.16 (Replacement Chain) еВook The Lesseig Company has an opportunity to invest in one of two mutually exclusive machines that will produce a product the company will need for the next eight years. Machine A costs $10 million but will provide after-tax inflows of $4.7 million per year for 4 years. If Machine A were replaced, its cost would be $11.2 million due to inflation and its cash inflows would increase to $5.1 million due to production efficiencies. Machine B costs $14.9 million and will provide after-tax inflows of $4 million per year for 8 years. If the WACC is 13%, which machine should be acquired? Explain. Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Do not round intermediate calculations. Round your answers to two decimal places. Machine -Select-is the better project and will increase the company's value by $ millions created by Machine -Select millions, rather than the $

Answer 1

		Present Value(PV) of Cash Flow:
		(Cash Flow)/((1+i)^N)
		i=discount rate =WACC=13%=0.13
		N=Year   of Cash Flow
		CASH FLOW ANALYSIS OF MACHINE A
	N	Year	0	1	2	3	4	5	6	7	8
	a	Initial cash out flow	-$10,000,000
	b	After tax cash inflow		$4,700,000	$4,700,000	$4,700,000	$4,700,000
	c	Investment in Replacement Machine					($11,200,000)
	d	After tax cash inflow from replacement machine						$5,100,000	$5,100,000	$5,100,000	$5,100,000
	CF=a+b+c+d	Net Cash Flow	($10,000,000)	$4,700,000	$4,700,000	$4,700,000	($6,500,000)	$5,100,000	$5,100,000	$5,100,000	$5,100,000	SUM
	PV=CF/(1.13^N)	Present Value of Net Cash Flow	($10,000,000)	$4,159,292	$3,680,789	$3,257,336	($3,986,572)	$2,768,076	$2,449,624	$2,167,809	$1,918,415	$6,414,770
	NPV=Sum of PV	Net Present Value(NPV)	$6,414,770
		CASH FLOW ANALYSIS OF MACHINE B
	N	Year	0	1	2	3	4	5	6	7	8
	a	Initial cash out flow	-$14,900,000
	b	After tax cash inflow		$4,000,000	$4,000,000	$4,000,000	$4,000,000	$4,000,000	$4,000,000	$4,000,000	$4,000,000
	CF=a+b	Net Cash Flow	($14,900,000)	$4,000,000	$4,000,000	$4,000,000	$4,000,000	$4,000,000	$4,000,000	$4,000,000	$4,000,000	SUM
	PV=CF/(1.13^N)	Present Value of Net Cash Flow	($14,900,000)	$3,539,823	$3,132,587	$2,772,201	$2,453,275	$2,171,040	$1,921,274	$1,700,243	$1,504,639	$4,295,081
	NPV=Sum of PV	Net Present Value(NPV)	$4,295,081
Machine	A	is the better project and will increase company value by	$6.41	million	rather than the	$4.30	million	created by	machine	B