Question

A company is evaluating the replacement of an old machine with a new one last year the company hired a consultant to conduct a feasibility study about this replacement project which cost them $1,000,000 at that time. The consulting fees were expensed last year The old machine was purchased 3 years ago for $4 million and was being depreciated using MACRS 5.yoar class (20%, 32% 19 2%, 11 52% 11.52% and 5 76%) The old machine can be sold for S1 million at this time the old machine is not replaced it can be sold for $500,000 four years from now The replacement machine has a cost of $3 million an estimated usolulite of 4 years This machine will be depreciated using straight line method to salvage value. The replacement machine would permitan output expansions Sales would nse by $1.5 million per year even so the new machine's much greater efficiency would cause operating expenses to decline by $350.000 per year. The new machine would require that inventones to increase by 51 milion accounts receivables to increase by $750,000 accounts payable increase by $100.000 and accrued expenses increase by $300.000 The interest expense on the debt component of the capital required for this project will be $350 000 annually. The now machine can be sold for $125.000 at the end of 4 years to another company The company's marginal federal plus state tax rate is 30% and WACC is 125 What is the CH4 (The cash flow to be used in NPV calculation) 2.307,500 1,974.500 2481 200 2.756.400 3,018,200

Answer 1

Here,

To arrive at the answer based on options given, following changes made assuming to be the correct question

in the question this line "The new machine would require that inventones to increase by 51 milion" is taken as 'The new machine would require that inventories to increase by $1 milion, WACC as 12.5%, accounts payable increase by $400,000

The answer matching the correct option is as follows (Answer: 2307500)

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