Question

Show in excel please with correct formula

Solve all the problems using after tax cash flow analysis, even the book ask in some of them to use BTCF

The Container Corporation of America is considering replacing an automatic painting machine purchased 9 years ago for $700,000. It has a market value today of $40,000. The unit costs $350,000 annually to operate and maintain. A new unit can be purchased for $800,000 and will have annualO&Mcosts of $120,000. If the old unit is retained, it will have no salvage value at the end of its remaining life of 10 years. The new unit, if purchased, will have a salvage value of $100,000 in 10 years. Using anEUACmeasure and aMARR of 20 percent, perform a before-tax analysis to see if the automatic painting machine should be replaced if it is taken as a trade-in for its market value of $40,000.

Use the opportunity cost approach (outsider’s viewpoint approach).

Answer 1

Note

This solution is based on the assumption that uniform equal costs are being incurred each year and the rate of return if the Minimum Acceptable Rate of Return for the enttity.

I. Cash Flows associated with old Machine

A. Costs to Operate - 350,000$(Annually)

B. Trade-in Market Value - 40,000$

II. Cash Flows Associated with New Machine

A. Cost of Purchasing New Machine - 800,000$

B. Annual operating and maintenenace costs - 120,000$

C. Salavge Value at the end of 10 year period - 100,000$

D. Minimum Acceptable Rate of Return(MARR) - 20%

Step I

Net Cash Outflow ( assumed at current cost ) [Present Value of Cost]

= Cost of New System - Market trade in value of Old System

= 800,000$ - 40,000$

=760,000$

Step II

Estimated change in Cash Flows operating cost if replacement decision was to be implemented

= Change in Revenue + Change in operating costs

=0 +(350,000$ - 120,000$)

=230,000$

Step III

Present Value of Benefits = Prsent Value of Yearly Cash Flows + Prsent Value of Estimated Salvage of New System

= 230,000$*PVIFA(20%, 10 Years) + 100,000$ * PVIF(20%, 10th year)

= 230,000$ * 4.1925 + 100,000$ * 0.1615

= 964,275$ +16,150$

= 980,425$

(NOTE - PVIFA means present value interest factor of annuity)

Step IV

Opportunity Cost = Net Cash Outflow - Prsent Value of Benefits

= 760,000$ - 980,425$

= - 220,425$

The opportunity cost is in Negative which indicates that the entity is going to Pre-tax Save 220,425$.

Hence the purchase of new unit would be beneficial for the entity.