Question

In: Finance

Suppose that your firm is considering replacing the current hydraulic lift system with a new one....

Suppose that your firm is considering replacing the current hydraulic lift system with a new one. The old system has a book value of $50,000 and a remaining life of 10 years and can be sold at a price of $10,000 after capital gains taxes, right now.

The old lift system would be replaced with a new one that costs $200,000 and has a depreciable life of 10 years. It’s annual operating costs are $20,000 lower than with the old machine.

Assume straight line depreciation for both the old and the new machines, a 35% tax rate and no salvage value on either machine in 10 years, and a cost of capital of 8% for the firm.

Evaluate whether or not the firm should replace the old hydraulic lift system with a new one.

Show your work, and explain what you conclusion is and why.

Solutions

Expert Solution

Conclusion: The NPV of the the new machine when replaced with old machine is -$67541 (which is negative). the investment in project should be rejected

Please comment if you face any difficulty and please dont forget to upvote


Related Solutions

Suppose Amazon is considering replacing an old packaging system with a new one. The old system...
Suppose Amazon is considering replacing an old packaging system with a new one. The old system has a book value of $50,000 and a remaining life of 10 years and could be sold for $75,000 right now. The new machine costs $150,000 and has a depreciable life of 10 years, annual operating costs $40,000 lower than the old machine. Assuming straight line depreciation, 40% tax rate, and no salvage value on either machine at the end of 10 years, should...
Suppose a company has a forklift but is considering purchasing a new electric lift truck that...
Suppose a company has a forklift but is considering purchasing a new electric lift truck that would cost $230,000 and has operating cost of $25,000 in the first year. For the remaining years, operating costs increase each year by 5% over the previous year’s operating costs. It loses 15% of its value every year from the previous year’s salvage value. The lift truck has a maximum life of 4 years. The firm’s required rate of return is 5%. Find the...
Suppose a company has a forklift but is considering purchasing a new electric lift truck that...
Suppose a company has a forklift but is considering purchasing a new electric lift truck that would cost $3000000 and has operating cost of $50500 in the first year. For the remaining years, operating costs increase each year by 35% over the previous year’s operating costs. It loses 7% of its value every year from the previous year’s salvage value. The lift truck has a maximum life of 6 years. The firm’s required rate of return is 5%. Find the...
Suppose a company has a forklift but is considering purchasing a new electric lift truck that...
Suppose a company has a forklift but is considering purchasing a new electric lift truck that would cost $230000 and has operating cost of $25000 in the first year. For the remaining years, operating costs increase each year by 5% over the previous year’s operating costs. It loses 15% of its value every year from the previous year’s salvage value. The lift truck has a maximum life of 4 years. The firm’s required rate of return is 5%. Find the...
A company is considering replacing its existing computer systemwith a new computer system. The new...
A company is considering replacing its existing computer system with a new computer system. The new system can offer considerable savings in computer processing and inventory management costs. Information about the existing system and the new system follow:Existing ComputerNew ComputerOriginal cost$10,000$15,000Annual operating cost$ 3,500$ 2,000Accumulated depreciation$ 6,000―Current salvage value of the existing system$ 4,000―Remaining life in 5 years5 yearsSalvage value in 5 years$ 0$ 0Annual depreciation$ 2,000$ 3,000Which of the following is an avoidable cost if a company gives up...
1. Suppose a company has a forklift but is considering purchasing a new electric lift truck...
1. Suppose a company has a forklift but is considering purchasing a new electric lift truck that would cost $230000 and has operating cost of $25000 in the first year. For the remaining years, operating costs increase each year by 15% over the previous year’s operating costs. It loses 12% of its value every year from the previous year’s salvage value. The lift truck has a maximum life of 5 years. The firm’s required rate of return is 5%. Find...
Your company is considering replacing an old machine with a new machine. The new machine will...
Your company is considering replacing an old machine with a new machine. The new machine will cost $1 million, will last for 5 years, and will have a salvage value of $200,000 at the end of five years. If the company replaces the old machine with the new machine, pre-tax operating costs will go down by $300,000 per year. The cost of the new machine ($1 million) will be depreciated over the 5 years life of the project using the...
A hydraulic lift in a garage has two pistons: a small one of cross-sectional area 4.50cm2...
A hydraulic lift in a garage has two pistons: a small one of cross-sectional area 4.50cm2 and a large one of cross-sectional area 220cm2 . There are two parts to this question please give CORRECT answer. Part A If this lift is designed to raise a 3400-kg car, what minimum force must be applied to the small piston? Part B If the force is applied through compressed air, what must be the minimum air pressure applied to the small piston?
A firm is considering replacing the existing industrial air conditioning unit. They will pick one of...
A firm is considering replacing the existing industrial air conditioning unit. They will pick one of two units. The first, the AC360, costs $26,454.00 to install, $5,152.00 to operate per year for 7 years at which time it will be sold for $7,182.00. The second, RayCool 8, costs $41,990.00 to install, $2,150.00 to operate per year for 5 years at which time it will be sold for $9,054.00. The firm’s cost of capital is 6.22%. What is the equivalent annual...
A firm is considering replacing the existing industrial air conditioning unit. They will pick one of...
A firm is considering replacing the existing industrial air conditioning unit. They will pick one of two units. The first, the AC360, costs $26,708.00 to install, $5,045.00 to operate per year for 7 years at which time it will be sold for $7,180.00. The second, RayCool 8, costs $41,711.00 to install, $2,042.00 to operate per year for 5 years at which time it will be sold for $9,069.00. The firm’s cost of capital is 5.34%. What is the equivalent annual...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT