Question

The Everly Equipment Company's flange-lipping machine was purchased 5 years ago for $90,000. It had an expected life of 10 years when it was bought and its remaining depreciation is $9,000 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 $150,000, including installation costs. During its 5-year life, it will reduce cash operating expenses by $45,000 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 $50,000. 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 whole dollar.
   $
2. 
   
3. 
   
4. 
   
5. 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 whole dollar.

   CF1	$
   CF2	$
   CF3	$
   CF4	$
   CF5	$

6. 
   
7. What is the NPV of this project? Do not round intermediate calculations. Round your answer to the nearest whole dollar.
   $
   
   Should Everly replace the flange-lipper?
       -Select-Yes No

Answer 1

a. Book value of the old machine = $ 45,000

Tax effect of gain on salvage = $ ( 50, 000 - 45,000) x 0.35 = $ 1,750.

After tax salvage value of old machine = $ 50,000 - $ 1,750 = $ 48,250.

Initial cash flow at Year 0 = - $ 150,000 + $ 48,250 = - $ 101,750.

e. Incremental Cash Flows:

Year	Incremental Savings	Depreciation on New Machine	Depreciation on Old Machine	Incremental Depreciation	Incremental Cash Flows After Taxes *
1	$ 45,000	$ 49,995	$ 9,000	$ 40,995	$ 43,598.25
2	45,000	66,675	9,000	57,675	49,436.25
3	45,000	22,215	9,000	13,215	33,875.25
4	45,000	11,115	9,000	2,115	29,990.25
5	45,000	-	9,000	(9,000)	26,100
		$ 150,000

* Incremental Cash Flows After Taxes = Incremental Savings x ( 1 - T ) + Incremental Depreciation x T.

g.

Year	Cash Flows	PV factor at 15 %	Present Values
0	$ (101,750)	1.00000	$ ( 101,750)
1	43,598.25	0.86957	37,911.73
2	49,436.25	0.75614	37,380.73
3	33,875.25	0.65752	22,273.65
4	29,990.25	0.57175	17,146.93
5	26,100	0.49718	12,976.40
		NPV	$ 25,939.44

NPV of the replacement project : $ 25,939.

Yes.