Question

The Everly Equipment Company's flange-lipping machine was purchased 5 years ago for $65,000. It had an expected life of 10 years when it was bought and its remaining depreciation is $6,500 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 life, it will reduce cash operating expenses by $25,000 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 $30,000. The firm's tax rate is 35%, and the appropriate cost of capital is 15%.

1. If the new flange-lipper is purchased, what is the amount of the initial cash flow at Year 0? Round your answer to the nearest dollar. Cash outflow, if any, 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? Do not round intermediate calculations. Round your answers to the nearest dollar. Cash outflows, if any, should be indicated by a minus sign.

   CF1	$
   CF2	$
   CF3	$
   CF4	$
   CF5	$

3. What is the NPV of this project? Do not round intermediate calculations. Round your answer to the nearest whole dollar. Negative value, if any, should be indicated by a minus sign.

   $  

   Should Everly replace the flange-lipper?

   -Select-YesNoItem 8

Answer 1

BV of old equipment = yearly depr*remaining years = 6500*5=32500

Time line		0	1	2	3	4	5
Proceeds from sale of existing asset	=selling price* ( 1 -tax rate)	19500
Tax shield on existing asset book value	=Book value * tax rate	11375
Cost of new machine		-160000
=a. Initial Investment outlay		-129125
3 years MACR rate			33.33%	44.45%	14.81%	7.41%	0.00%	0.00%
Savings			25000	25000	25000	25000	25000
-Depreciation	=Cost of machine*MACR%		-53328	-71120	-23696	-11856	0	0	=Salvage Value
=Pretax cash flows			-28328	-46120	1304	13144	25000
-taxes	=(Pretax cash flows)*(1-tax)		-18413.2	-29978	847.6	8543.6	16250
+Depreciation			53328	71120	23696	11856	0
=after tax operating cash flow			34914.8	41142	24543.6	20399.6	16250
+Proceeds from sale of equipment after tax	=selling price* ( 1 -tax rate)						0
+Tax shield on salvage book value	=Salvage value * tax rate						0
=Terminal year after tax cash flows							0
b. Total Cash flow for the period		-129125	34915	41142	24544	20400	16250
Discount factor=	(1+discount rate)^corresponding period	1	1.15	1.3225	1.520875	1.7490063	2.0113572
Discounted CF=	Cashflow/discount factor	-129125	30360.86957	31109.26276	16138.07841	11663.766	8079.1219
c. NPV=	Sum of discounted CF=	-31774.00

Reject as NPV = 0