Question

The Everly Equipment Company's flange-lipping machine was purchased 5 years ago for $100,000. It had an expected life of 10 years when it was bought and its remaining depreciation is $10,000 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 $160,000, 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 $55,000. The firm's tax rate is 35%, and the appropriate cost of capital is 16%.

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. $

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 $

What is the NPV of this project? Do not round intermediate calculations. Round your answer to the nearest whole dollar.

Answer 1

Tax rate	35%
		Old machine	New Machine
Cost of macine		100,000	160,000
Depreciation for 5 years		50,000	160,000
WDV		50,000	-
Sale price		55,000	20,000
Profit		5,000	20,000
Tax @ 35%		1,750	7,000
Sale price after tax		53,250	13,000
Purchase price of new machine		160,000
Incremental net cash flow at year 0		106,750
Depreciation	Year-1	Year-2	Year-3	Year-4	Year-5	Total
Cost	160,000	160,000	160,000	160,000	160,000
Dep Rate	33.33%	44.45%	14.81%	7.41%	0.00%
Deprecaition	53,328	71,120	23,696	11,856	-	160,000
Old Depreciation	10,000	10,000	10,000	10,000	10,000
Incremental Depreciation	43,328	61,120	13,696	1,856	(10,000)
	Year-1	Year-2	Year-3	Year-4	Year-5
Saving in operating expense	45,000	45,000	45,000	45,000	45,000
Less: Depreciation as per table given below	(43,328)	(61,120)	(13,696)	(1,856)	10,000
Impact on profit	1,672	(16,120)	31,304	43,144	55,000
Tax	585	(5,642)	10,956	15,100	19,250
Profit After Tax	1,087	(10,478)	20,348	28,044	35,750
Add Depreciation	43,328	61,120	13,696	1,856	(10,000)
Cash Profit After tax	44,415	50,642	34,044	29,900	25,750
Calculation of NPV
Year	Captial	Operating cash	Annual Cash flow	PV factor @ 16%	Present values
0	(106,750)		(106,750)	1.000	(106,750)
1		44,415	44,415	0.862	38,289
2		50,642	50,642	0.743	37,635
3		34,044	34,044	0.641	21,810
4		29,900	29,900	0.552	16,513
5	13,000	25,750	38,750	0.476	18,449
				Net Present Value	25,947