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One year? ago, your company purchased a machine used in manufacturing for $90,000. You have learned...

One year? ago, your company purchased a machine used in manufacturing for $90,000. You have learned that a new machine is available that offers many advantages and that you can purchase it for $150,000 today. The CCA rate applicable to both machines is 30%?; neither machine will have any? long-term salvage value. You expect that the new machine will produce earnings before? interest, taxes,? depreciation, and amortization (EBITDA) of $60,000 per year for the next ten years. The current machine is expected to produce EBITDA of $23,000 per year. All other expenses of the two machines are identical. The market value today of the current machine is $50,000. Your? company's tax rate is 42%?, and the opportunity cost of capital for this type of equipment is 11%. What is the NPV of replacement?

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Statement showing depreciation on old machine

Year Opening balance Depreciation Closing balance
1 76500 22950 53550
2 53550 16065 37485
3 37485 11246 26240
4 26240 7872 18368
5 18368 5510 12857
6 12857 3857 9000
7 9000 2700 6300
8 6300 1890 4410
9 4410 1323 3087
10 3087 926 2161

Statement showing depreciation on one machine

Year Opening balance Depreciation Closing balance
1 150000 22500 127500
2 127500 38250 89250
3 89250 26775 62475
4 62475 18743 43733
5 43733 13120 30613
6 30613 9184 21429
7 21429 6429 15000
8 15000 4500 10500
9 10500 3150 7350
10 7350 2205 5145

Statement showing incremental depreciation

Year Old Depreciation New Depreciation Incremental
1 22950 22500 -450
2 16065 38250 22185
3 11246 26775 15529
4 7872 18743 10871
5 5510 13120 7610
6 3857 9184 5327
7 2700 6429 3729
8 1890 4500 2610
9 1323 3150 1827
10 926 2205 1279

Statement hsowing NPV

Particulars 0 1 2 3 4 5 6 7 8 9 10 Total
Incremental Cost ( 150000- 61130) -88870
Incremental EBITDA 37000 37000 37000 37000 37000 37000 37000 37000 37000 37000
Incremental Depreciation -450 22185 15529 10871 7610 5327 3729 2610 1827 1279
PBT 37450 14815 21471 26129 29390 31673 33271 34390 35173 35721
Tax @ 42% 15729 6222 9018 10974 12344 13303 13974 14444 14773 15003
PAT 21721 8593 12453 15155 17046 18370 19297 19946 20400 20718
Add: Depreciation -450 22185 15529 10871 7610 5327 3729 2610 1827 1279
Cash flow 21271 30778 27982 26026 24656 23697 23026 22556 22227 21997
Toatl cash flow -88870 21271 30778 27982 26026 24656 23697 23026 22556 22227 21997
PVIF @ 11% 1 0.9009 0.8116 0.7312 0.6587 0.5935 0.5346 0.4817 0.4339 0.3909 0.3522
Present value -88870 19163 24980 20460 17144 14632 12670 11091 9788 8689 7747 57494

Statement showing Cash inflow on sale of old machine

Particulars Amount
Salvage value of old machine 50000
Book value 76500
Loss 26500
Tax savings @ 42% 11130
Cash inflow 61130

jeff jeffy answered 2 years ago
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