Question

In: Finance

Your corporation is considering replacing older equipment. The old machine is fully depreciated and cost $60,304.00...

Your corporation is considering replacing older equipment. The old machine is fully depreciated and cost $60,304.00 seven years ago. The old equipment currently has no market value. The new equipment cost $74,133.00 . The new equipment will be depreciated to zero using straight-line depreciation for the four-year life of the project. At the end of the project the equipment is expected to have a salvage value of $13,952.00 . The new equipment is expected to save the firm $15,285.00 annually by increasing efficiency and cost savings. The corporation has tax rate of 39.45% and a required return on capital of 8.55% .

a) What is the total initial cash outflow? (show as negative number)

b) What are the estimated annual operating cash flows?

c) What is the terminal cash flow?

d) What is the NPV for this project?

Solutions

Expert Solution

Answer to Part a:

Cost of New Equipment

Initial Cash Outflow = -Cost of New Equipment
Initial Cash Outflow = -$74,133.00

Answer to Part b:

Initial Investment = $74,133.00
Useful Life = 4 years

Annual Depreciation = Initial Investment / Useful Life
Annual Depreciation = $74,133.00 / 4
Annual Depreciation = $18,533.25

Annual Operating Cash Flow = Pretax Cost Saving * (1 - tax) + tax * Depreciation
Annual Operating Cash Flow = $15,285.00 * (1 - 0.3945) + 0.3945 * $18,533.25
Annual Operating Cash Flow = $15,285.00 * 0.6055 + 0.3945 * $18,533.25
Annual Operating Cash Flow = $16,566.43

Answer to Part c:

Salvage Value = $13,952.00

After-tax Salvage Value = Salvage Value * (1 - tax)
After-tax Salvage Value = $13,952.00 * (1 - 0.3945)
After-tax Salvage Value = $8,447.94

Terminal Cash Flow = After-tax Salvage Value
Terminal Cash Flow = $8,447.94

Answer to Part d:

Required return = 8.55%

NPV = -$74,133.00 + $16,566.43/1.0855 + $16,566.43/1.0855^2 + $16,566.43/1.0855^3 + $16,566.43/1.0855^4 + $8,447.94/1.0855^4
NPV = -$13,843.38


Related Solutions

Your corporation is considering replacing older equipment. The old machine is fully depreciated and cost $51800...
Your corporation is considering replacing older equipment. The old machine is fully depreciated and cost $51800 seven years ago. The old equipment currently has no market value. The new equipment cost $63100. The new equipment will be depreciated to zero using straight-line depreciation for the four-year life of the project. At the end of the project the equipment is expected to have a salvage value of $37500. The new equipment is expected to save the firm $29000 annually by increasing...
Q4) Your corporation is considering replacing older equipment. The old machine is fully depreciated and cost...
Q4) Your corporation is considering replacing older equipment. The old machine is fully depreciated and cost $66,263.00 seven years ago. The old equipment currently has no market value. The new equipment cost $59,022.00 . The new equipment will be depreciated to zero using straight-line depreciation for the four-year life of the project. At the end of the project the equipment is expected to have a salvage value of $33,912.00 . The new equipment is expected to save the firm $22,506.00...
Your corporation is considering replacing older equipment. The old machine is fully depreciated and cost $61,372.00...
Your corporation is considering replacing older equipment. The old machine is fully depreciated and cost $61,372.00 seven years ago. The old equipment currently has no market value. The new equipment cost $84,355.00 . The new equipment will be depreciated to zero using straight-line depreciation for the four-year life of the project. At the end of the project the equipment is expected to have a salvage value of $12,497.00 . The new equipment is expected to save the firm $30,152.00 annually...
Q) Your corporation is considering replacing older equipment.  The old machine is fully depreciated and cost  $47,124.00  seven years...
Q) Your corporation is considering replacing older equipment.  The old machine is fully depreciated and cost  $47,124.00  seven years ago.  The old equipment currently has no market value. The new equipment cost $54,516.00 .  The new equipment will be depreciated to zero using straight-line depreciation for the four-year life of the project. At the end of the project the equipment is expected to have a salvage value of $32,908.00 .  The new equipment is expected to save the firm $35,365.00  annually by increasing efficiency and cost savings.  The...
You are is considering replacing a five-year-old machine that originally cost $50,000. It was being depreciated...
You are is considering replacing a five-year-old machine that originally cost $50,000. It was being depreciated using straight-line to an expected salvage value of zero over its original 10-year life and could now be sold for $40,000. The replacement machine would cost $190,000 and have a five-year expected life. It would be depreciated using the MACRS 5-year class life. The actual expected salvage value of this machine after five years is $20,000. The new machine is expected to operate much...
You are is considering replacing a five-year-old machine that originally cost $50,000. It was being depreciated...
You are is considering replacing a five-year-old machine that originally cost $50,000. It was being depreciated using straight-line to an expected salvage value of zero over its original 10-year life and could now be sold for $40,000. The replacement machine would cost $190,000 and have a five-year expected life. It would be depreciated using the MACRS 5-year class life. The actual expected salvage value of this machine after five years is $20,000. The new machine is expected to operate much...
Russell Industries is considering replacing a fully depreciated machine that has a remaining useful life of...
Russell Industries is considering replacing a fully depreciated machine that has a remaining useful life of 10 years with a newer, more sophisticated machine. The new machine will cost $350,000 and will require $30,000 in installation costs. It will be depreciated under MACRS using a 5-year recovery period. A $25,000 increase in net working capital will be required to support the new machine. The firm’s managers plan to evaluate the potential replacement over a 4-year period. They estimate that the...
Russell Industries is considering replacing a fully depreciated machine that has a remaining useful life of...
Russell Industries is considering replacing a fully depreciated machine that has a remaining useful life of 10 years with a newer, more sophisticated machine. The new machine will cost $350,000 and will require $30,000 in installation costs. It will be depreciated under MACRS using a 5-year recovery period. A $25,000 increase in net working capital will be required to support the new machine. The firm’s managers plan to evaluate the potential replacement over a 4-year period. They estimate that the...
Russell Industries is considering replacing a fully depreciated machine that has a remaining useful life of...
Russell Industries is considering replacing a fully depreciated machine that has a remaining useful life of 10 years with a​ newer, more sophisticated machine. The new machine will cost $ 207,000 and will require $ 30,500 in installation costs. It will be depreciated under MACRS using a​ 5-year recovery period​ (see the table for the applicable depreciation​ percentages). Rounded Depreciation Percentages by Recovery Year Using MACRS for First Four Property Classes Percentage by recovery​ year* Recovery year 3 years 5...
You are considering replacing a five-year-old machine that originally cost $50,000. It was being depreciated using...
You are considering replacing a five-year-old machine that originally cost $50,000. It was being depreciated using straight-line to an expected salvage value of zero over its original 10-year life and could now be sold for $40,000. The replacement machine would cost $190,000 and have a five-year expected life. It would be depreciated using the MACRS 5-year class life. The actual expected salvage value of this machine after five years is $20,000. The new machine is expected to operate much more...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT