Question

Relevant 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 $46,800​, 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 $75,900 and requires $3,600 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 $55,900 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	$749,600	$720,600		$674,700	$660,400
2	749,600	720,600		676,700	660,400
3	749,600	720,600		680,700	660,400
4	749,600	720,600		78,700	660,400
5	749,600	720,600		674,700	660,400

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​%

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

(A) Initial investment Amount

Particulars	Amount ($)
Cost of New machine	75900
Add : Installation cost	3600
Less : sale of old machine	(55900)
Initial investment require	$ 23600

(B) Incremental cash inflow

Cash inflow of old machine

on old machine already 3 year depreciation is provided.

particular	year1	2	3	4	5
revenue	749600	749600	749600	749600	749600
less - exp	(720600)	(720600)	(720600)	(720600)	(720600)
less - Dep	(5616)	(5616)	(2340)	0	0
PBT	23384	23384	26660	29000	29000
Less - tax 40%	9353.60	9353.60	10664	11600	11600
PAT	14030.40	14030.40	15996	17400	17400
Add - Dep	5616	5616	2340	0	0
cash inflow	19646.40	19646.40	18336	17400	17400

cash inflow of new machine

it is assumed that 4 th year's revenue is 6,78700 but you provided 78700 it seems wrong . if assumed amount is wrong then change 4 th year calculation only .

particular	year1	2	3	4	5
revenue	674700	676700	680700	678700	674700
less - exp	(660400)	(660400)	(660400)	(660400)	(660400)
less - Dep	(15900)	(25440)	(15105)	(9540)	(9540)
PBT	(1600)	(9140)	5195	8760	4760
Less - tax 40%	640	3656	(2078)	(3504)	(1904)
PAT	(960)	(5484)	3117	5456	2856
Add - Dep	15900	25440	15105	9540	9540
cash inflow	14940	19956	18222	14796	12396

increnental cash inflow

year	old machine	new machine	increment
1	19646.40	14940	-4706.4
2	19646.40	19956	309.6
3	19336	18222	-1114
4	17400	14796	-2604
5	17400	12396	-5004

(C) here only 2nd year shows incremental cash inflows . therefore it is not beneficeal for replace the machine with new one