One year? ago, your company purchased a machine used in manufacturing for $115,000. You have learned...

One year? ago, your company purchased a machine used in manufacturing for $115,000. 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 20%?; 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 $50,000 per year for the next ten years. The current machine is expected to produce EBITDA of $ 23 comma 000$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 40%?, and the opportunity cost of capital for this type of equipment is11%. Should your company replace its? year-old machine? What is the NPV of? replacement?

Solutions

Expert Solution

Statement showing Depreciation on old machine

Year	Opening balance	Depreciation	Closing balance
1	103500	20700	82800
2	82800	16560	66240
3	66240	13248	52992
4	52992	10598	42394
5	42394	8479	33915
6	33915	6783	27132
7	27132	5426	21706
8	21706	4341	17364
9	17364	3473	13892
10	13892	2778	11113

Statement showing Depreciation on new machine

Year	Opening balance	Depreciation	Closing balance
1	150000	15000	135000
2	135000	27000	108000
3	108000	21600	86400
4	86400	17280	69120
5	69120	13824	55296
6	55296	11059	44237
7	44237	8847	35389
8	35389	7078	28312
9	28312	5662	22649
10	22649	4530	18119

Statement showing Incremental depreciation

Year	Depreciation on old machine	Depreciation on new machine	Incremental depreciation
1	20700	15000	-5700
2	16560	27000	10440
3	13248	21600	8352
4	10598	17280	6682
5	8479	13824	5345
6	6783	11059	4276
7	5426	8847	3421
8	4341	7078	2737
9	3473	5662	2189
10	2778	4530	1752

Statement showing NPV

Particulars	0	1	2	3	4	5	6	7	8	9	10	NPV
Incremental cost(150000-71400)	-78600
Incremental EBITDA(50000-23000)		27000	27000	27000	27000	27000	27000	27000	27000	27000	27000
Incremental depreciation		-5700	10440	8352	6682	5345	4276	3421	2737	2189	1752
PBT		32700	16560	18648	20318	21655	22724	23579	24263	24811	25248
Tax @ 40%		13080	6624	7459	8127	8662	9090	9432	9705	9924	10099
PAT		19620	9936	11189	12191	12993	13634	14147	14558	14886	15149
Add: Depreciation		-5700	10440	8352	6682	5345	4276	3421	2737	2189	1752
Annual cash flow		13920	20376	19541	18873	18338	17910	17568	17295	17076	16901
Total cash flow	-78600	13920	20376	19541	18873	18338	17910	17568	17295	17076	16901
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	-78600	12541	16538	14288	12432	10883	9576	8462	7505	6675	5952	26251

Statement showing Cash flow from sale of equipment

Particulars	Amount
Salavage value	50000
Book value(115000-10%)	103500
Loss	53500
Tax @ 40%	21400
Cash inflow	71400

jeff jeffy answered 1 year ago

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