Question

Net cash flows-No terminal value Central Laundry and Cleaners is considering replacing an existing piece of machinery with a more sophisticated machine. The old machine was purchased 3 years ago at a cost of $47,100, and this amount was being depreciated under MACRS using a​ 5-year recovery period. The machine has 5 years of usable life remaining. The new machine that is being considered costs $76,700 and requires $4,000 in installation costs. The new machine would be depreciated under MACRS using a​ 5-year recovery period. The firm can currently sell the old machine for $54,300 without incurring any removal or cleanup costs. The firm is subject to a tax rate of 40%. The revenues and expenses​ (excluding depreciation and​ interest) associated with the new and the old machines for the next 5 years are given in the table

    New machine           Old machine  
Year   Revenue   Expenses
(excluding depreciation and interest)       Revenue   Expenses
(excluding depreciation and interest)
1   $749,200    $719,600       $673,700   $659,100
2   749,200   719,600       675,700   659,100
3   749,200   719,600       679,700   659,100
4   749,200   719,600       677,700   659,100
5   749,200   719,600       673,700   659,100

(Table

Rounded Depreciation Percentages by Recovery Year Using MACRS for
First Four Property Classes              
   Percentage by recovery year*          
Recovery year    3 years    5 years    7 years    10 years
1                         33%         20%         14%          10%
2                       45%           32%        25%           18%
3                        15%           19% 18%      14%
4                          7%            12%       12%       12%
5                                           12%         9%        9%
6                                            5%         9%         8%
7                                                          9%       7%
8                                                        4%        6%
9                                                                   6%
10                                                                  6%
11                                                                 4%
Totals   100%   100%   100%   100%
               

contains the applicable MACRS depreciation​ percentages.) Note: The new machine will have no terminal value at the end of 5 years.)

a. Calculate the initial investment associated with replacement of the old machine by the new one.

b. Determine the incremental operating cash inflows associated with the proposed replacement.​ (Note: Be sure to consider the depreciation in year​ 6.)

c. Depict on a time line the relevant cash flows found in parts (a​) and (b​) associated with the proposed replacement decision.

Answer 1

Please find the solution in given screen shots,

Amount in $,

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