Question

REPLACEMENT ANALYSIS

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 $150,000, including installation costs. During its 5-year life, it will reduce cash operating expenses by $50,000 per year. Sales are not expected to change. At the end of its useful life, the 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%, 45%, 15%, and 7%.

The old machine can be sold today for $60,000. The firm's tax rate is 40%. The appropriate WACC is 9%.

1. If the new machine is purchased, what is the amount of the initial cash flow at Year 0? Round your answer to the nearest dollar. Negative amount should be indicated by a minus sign.
   $
2. What are the incremental net cash flows that will occur at the end of Years 1 through 5? Round your answers to the nearest dollar.

   Year 1	Year 2	Year 3	Year 4	Year 5
   $	$	$	$	$

3. What is the NPV of this project? Round your answer to the nearest cent. Negative amount should be indicated by a minus sign.
   $

please help.Thank you!

Answer 1

		Initial Cash Flow in Year 0
		Cost of new Machine	($150,000)
		Before Tax Salvage Value of old machine	$60,000
		Book Value of the old machine =90000-(5*9000)	$45,000
		Gain On Salvage	$15,000	(60000-45000)
		Tax on gain =40%*15000	$6,000
		After Tax cash flow on Salvage of old machine now	$54,000	(60000-6000)
	I	Initial Cash Flow in Year 0	($96,000)	(-15000+54000)
		DEPRECIATION OF OLD MACHINE
		Year From Today	1	2	3	4	5
	D1	Annual Depreciation expense	$9,000	$9,000	$9,000	$9,000	$9,000
		Salvage value (Before tax) at end of year 5	$5,000
		After tax salvage value at end of year 5	$3,000	(50000*(1-0.4)
		DEPRECIATION OF NEW MACHINE
		Year(from today)	1	2	3	4	5
	A	Depreciation Rate	33%	45%	15%	7%	0%
	D2=A*150000	Depreciation amount	$49,500	$67,500	$22,500	$10,500	$0
		INCREMENTAL NET CASH FLOW
	N	Year From Today	1	2	3	4	5
	D=D2-D1	Incremental Depreciation	$40,500	$58,500	$13,500	$1,500	($9,000)
	E=D*40%	Depreciation tax shield	$16,200	$23,400	$5,400	$600	($3,600)
	B	Before tax incremental Savings	$50,000	$50,000	$50,000	$50,000	$50,000
	C=B*(1-0.4)	After tax Incremental Savings	$30,000	$30,000	$30,000	$30,000	$30,000
	F	After Tax Incremental Salvage Value					($3,000)
	CF=E+C+F	Net Incremental Cash Inflow	$46,200	$53,400	$35,400	$30,600	$23,400
		Present Value (PV)of Cash Inflow=(Cash Flow)/((1+i)^N)		i= Discount Rate =WACC=9%=0.09, N =Year of Cash Flow)
	G=CF/(1.09^N)	Present Value of Cash Inflow	$42,385	$44,946	$27,335	$21,678	$15,208	$151,553	SUM
	PV	Sumof Present Value of Cash inflows	$151,553
		NPV=PV+I=151553-96000=	$55,553
	c	NPV of the project	$55,553