Question

Replacement Analysis

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 is being depreciated by the straight-line method by $10,000 per year. As the 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 $130,000, 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 WACC is 14%.

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. Enter negative answers with minus sign.
   $   
2. 
   
3. 
   
4. 
   
5. What are the incremental net cash flows that will occur at the end of Years 1 through 5? Round your answers to the nearest whole dollar.

   CF1	$
   CF2	$
   CF3	$
   CF4	$
   CF5	$

6. 
   
7. What is the NPV of this project? Round your answer to the nearest whole dollar.
   $   

Answer 1

Question a:

Initial Cash Flow in Year 0 is -$80,000

Question b:

Increemntal Net Cash Flows

Year 1: $40,915.15

Year 2: $45,974.75

Year 3: $32,488.55

Year 4: $29,121.55

Year 5: $25,750

Question c:

NPV of the Project is $40,435.55