Question

Suppose Mayco wants to replace an existing printer with a new high-speed copier. The existing printer was purchased 7 years ago at a cost of $21,000. The printer is being depreciated using straight-line basis assuming a useful life of 12 years and no salvage value. If the existing printer is not replaced, it will have zero market value at the end of its useful life.

The new high-speed copier can be purchased for $25,000 (including freight and installation). Over its 5-year life, it will reduce labor and raw materials usage sufficiently to cut annual operating costs from $15,000 to $8,000. This reduction in costs will cause before-tax profits to rise by an equal amount. It is estimated that the new copier can be sold for $4,400 at the end of five years; this is its estimated salvage value. The old printer's current market value is $8,955. If the new copier is acquired, the old printer will be sold to another company.

The company's marginal federal-plus-state tax rate is 40.00%, and the replacement copier is of slightly below-average risk. Net working capital requirements will also increase by $4,200 at the time of replacement. By an IRS ruling, the new copier falls into the 3-year MACRS class. The project's cost of capital is set at 8.05%. Under MACRS, the pre-tax depreciation for the new equipment is: Year 1 = $8,250; Year 2 = $11,250; Year 3 = $3,750; Year 4 = $1,750; Year 5 = 0. The initial investment outlay is closest to

1. The initial investment outlay is closest to

   	a.	$26,000
   	b.	$18,555
   	c.	$22,300
   	d.	$20,327
   	e.	$22,300

Year 1 cash flow is closest to

	a.	$8600
	b.	$4200
	c.	$3500
	d.	$6800
	e.	$7800

Year 2 cash flow is closest to

	a.	$7500
	b.	$8500
	c.	$9000
	d.	$8000
	e.	$7000

1. Year 3 cash flow is closest to

   	a.	$7500
   	b.	$5000
   	c.	$6500
   	d.	$6000
   	e.	$5500

Year 4 cash flow is closest to

	a.	$4200
	b.	$3200
	c.	$5200
	d.	$4800
	e.	$6200

Year 5 cash flow (including TNOCF) is closest to

	a.	$8340
	b.	$12340
	c.	$10340
	d.	$9340
	e.	$6840

NPV of this project is closest to

	a.	$8885
	b.	$7885
	c.	$6885
	d.	$9885
	e.	$10885

Answer 1

The initial investment outlay is closest to Option D. $20,327

Year 1 cash flow is closest to Option D. $6800

Year 2 cash flow is closest to Option D $8000

Year 3 cash flow is closest to Option B $5000

Year 4 cash flow is closest to Option A $4200

Year 5 cash flow (including TNOCF) is closest to Option C $10340

NPV of this project is closest to Option C $6885