Suda Marine Engines, Inc. must develop the relevant cash flows for a replacement capital investment proposal....

Suda Marine Engines, Inc. must develop the relevant cash flows for a replacement capital investment proposal. The proposed asset costs $50,000 and has installation costs of $5,000 and will be put into operation for the next three years. The asset will be depreciated using a three-year recovery schedule (with MARCS depreciation rates of 45%, 33%, 15%, 7% for years 1 to 4). The existing equipment, which originally cost $25,000 is fully depreciated and has no salvage value today. The new equipment is expected to result in incremental before tax revenue of $15,000 per year but has no effect on cost. As a result of this replacement, net working capital rises by $5,000 today but will be recovered at the end of the 3rd year. The new machine is expected to be sold for $15,000 before taxes at the end of 3rd year. The firm has a 40 percent tax rate and its cost of capital is 10%.

a) What is the new asset's initial cash outlay?
b) What are the new asset's depreciations?
c) What are the new asset's operating cash flows for the years 1, 2, & 3?
d) What is the new asset's terminal cash flow?
e) What is the NPV of this asset? Should Suda buy the new asset?

Solutions

Expert Solution

a) What is the new asset's initial cash outlay?

$55000
b) What are the new asset's depreciations?

Year 1 = 24750

Year 2 = 18150

Year 1 = 8250

c) What are the new asset's operating cash flows for the years 1, 2, & 3?

OCF Year 1 = $18900

OCF Year 2 = $16260

OCF Year 3 = $12300

d) What is the new asset's terminal cash flow?

15000 - 4460 = $10540

e) What is the NPV of this asset? Should Suda buy the new asset?

NPV = -$8463.56

as NPV is negative it is not recommended to buy the asset

Please dont forget to upvote

jeff jeffy answered 1 year ago

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