Question
In: Finance
One year ago your company purchased a machine used in manufacturing for $115,000. You have learned...
One year ago your company purchased a machine used in manufacturing for $115,000. You have learned that q new machine is available that offers many advantages and you can purchase it for $150,000 today. It will be depreciated on a straight-line basis over 10 years and has no salvage value. You expect that the new machine will produce a gross margin revenues minus operating expenses other than depreciation) of $55,000 per year for the next 10 years. The current machine is expected to produce a gross margin of $24,000 per year. The current machine is being depreciated on straight-line basis over a useful life of 11 years, and has no salvage value, so depreciation expense for the current machine is $10,455 per year. The market value today of the current machine is $65,000. Your company's tax rate is 40%, and the opportunity cost of capital for this type of equipment is 11%. Should your company replace its year- old machine?
Solutions
Expert Solution
| Summary | |
| NPV of new machine | $ 79,680.05 |
| NPV of old machine | $ 44,433.71 |
Replace the machine:
NPV of old machine:
| Ref | Particulars | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 | Year 7 | Year 8 | Year 9 | Year 10 | |
| a | Operating cash flow | $ 24,000.00 | $ 24,000.00 | $ 24,000.00 | $ 24,000.00 | $ 24,000.00 | $ 24,000.00 | $ 24,000.00 | $ 24,000.00 | $ 24,000.00 | $ 24,000.00 | |
| Salvage value | ||||||||||||
| b | Depreciation | $ (10,455.00) | $ (10,455.00) | $ (10,455.00) | $ (10,455.00) | $ (10,455.00) | $ (10,455.00) | $ (10,455.00) | $ (10,455.00) | $ (10,455.00) | $ (10,455.00) | |
| c=a-b | Profit before tax | $ 13,545.00 | $ 13,545.00 | $ 13,545.00 | $ 13,545.00 | $ 13,545.00 | $ 13,545.00 | $ 13,545.00 | $ 13,545.00 | $ 13,545.00 | $ 13,545.00 | |
| Profit after tax | $ 8,127.00 | $ 8,127.00 | $ 8,127.00 | $ 8,127.00 | $ 8,127.00 | $ 8,127.00 | $ 8,127.00 | $ 8,127.00 | $ 8,127.00 | $ 8,127.00 | ||
| Add depreciation | $ 10,455.00 | $ 10,455.00 | $ 10,455.00 | $ 10,455.00 | $ 10,455.00 | $ 10,455.00 | $ 10,455.00 | $ 10,455.00 | $ 10,455.00 | $ 10,455.00 | ||
| Add: working capital | ||||||||||||
| Free cash flow | $ 18,582.00 | $ 18,582.00 | $ 18,582.00 | $ 18,582.00 | $ 18,582.00 | $ 18,582.00 | $ 18,582.00 | $ 18,582.00 | $ 18,582.00 | $ 18,582.00 | ||
| d | Present value factor@ 11.0% | 0.900900901 | 0.811622433 | 0.731191381 | 0.658730974 | 0.593451328 | 0.534640836 | 0.481658411 | 0.433926496 | 0.390924771 | 0.352184479 | |
| e=c*d | Present value of annual cashflows | $ 16,740.54 | $ 15,081.57 | $ 13,587.00 | $ 12,240.54 | $ 11,027.51 | $ 9,934.70 | $ 8,950.18 | $ 8,063.22 | $ 7,264.16 | $ 6,544.29 | |
| Total present value of annual cash inflows | $ 1,09,433.71 | |||||||||||
| Investment: | ||||||||||||
| Equipment | $ (65,000.00) | |||||||||||
| Working capital | $ - | |||||||||||
| NPV | $ 44,433.71 |
NPV of new machine
| Ref | Particulars | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 | Year 7 | Year 8 | Year 9 | Year 10 | |
| a | Operating cash flow | $ 55,000.00 | $ 55,000.00 | $ 55,000.00 | $ 55,000.00 | $ 55,000.00 | $ 55,000.00 | $ 55,000.00 | $ 55,000.00 | $ 55,000.00 | $ 55,000.00 | |
| Salvage value | ||||||||||||
| b | Depreciation | $ (15,000.00) | $ (15,000.00) | $ (15,000.00) | $ (15,000.00) | $ (15,000.00) | $ (15,000.00) | $ (15,000.00) | $ (15,000.00) | $ (15,000.00) | $ (15,000.00) | |
| c=a-b | Profit before tax | $ 40,000.00 | $ 40,000.00 | $ 40,000.00 | $ 40,000.00 | $ 40,000.00 | $ 40,000.00 | $ 40,000.00 | $ 40,000.00 | $ 40,000.00 | $ 40,000.00 | |
| Profit after tax | $ 24,000.00 | $ 24,000.00 | $ 24,000.00 | $ 24,000.00 | $ 24,000.00 | $ 24,000.00 | $ 24,000.00 | $ 24,000.00 | $ 24,000.00 | $ 24,000.00 | ||
| Add depreciation | $ 15,000.00 | $ 15,000.00 | $ 15,000.00 | $ 15,000.00 | $ 15,000.00 | $ 15,000.00 | $ 15,000.00 | $ 15,000.00 | $ 15,000.00 | $ 15,000.00 | ||
| Add: working capital | $ - | $ - | $ - | $ - | $ - | $ - | $ - | $ - | $ - | $ - | ||
| Free cash flow | $ 39,000.00 | $ 39,000.00 | $ 39,000.00 | $ 39,000.00 | $ 39,000.00 | $ 39,000.00 | $ 39,000.00 | $ 39,000.00 | $ 39,000.00 | $ 39,000.00 | ||
| d | Present value factor@ 11.0% | 0.900900901 | 0.811622433 | 0.731191381 | 0.658730974 | 0.593451328 | 0.534640836 | 0.481658411 | 0.433926496 | 0.390924771 | 0.352184479 | |
| e=c*d | Present value of annual cashflows | $ 35,135.14 | $ 31,653.27 | $ 28,516.46 | $ 25,690.51 | $ 23,144.60 | $ 20,850.99 | $ 18,784.68 | $ 16,923.13 | $ 15,246.07 | $ 13,735.19 | |
| Total present value of annual cash inflows | $ 2,29,680.05 | |||||||||||
| Investment: | ||||||||||||
| Equipment | $ (1,50,000.00) | |||||||||||
| Working capital | $ - | |||||||||||
| NPV | $ 79,680.05 |
jeff jeffy answered 1 year agoRelated Solutions
One year? ago, your company purchased a machine used in manufacturing for $115,000. You have learned...
One year? ago, your company purchased a machine used in
manufacturing for $115,000. You have learned that a new machine is
available that offers many advantages and that you can purchase it
for $150,000 today. The CCA rate applicable to both machines is
20%?; neither machine will have any? long-term salvage value. You
expect that the new machine will produce earnings before? interest,
taxes,? depreciation, and amortization ?(EBITDA?) of $50,000 per
year for the next ten years. The current machine...
One year ago, your company purchased a machine used in manufacturing for $ 115,000. You have...
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One year ago, your company purchased a machine used in manufacturing for $ 115,000 You have...
One year ago, your company purchased a machine used in
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You have learned that a new machine is available that offers
many advantages and you can purchase it for
$ 160,000
today. It will be depreciated on a straight-line basis over 10
years and has no salvage value. You expect that the new machine
will produce a gross margin (revenues minus operating expenses
other than depreciation) of
$ 50,000
per year for the next 10 years....
One year ago, your company purchased a machine used in manufacturing for $ 115,000. You have...
One year ago, your company purchased a machine used in
manufacturing for $ 115,000. You have learned that a new machine is
available that offers many advantages; you can purchase it for $
150,000 today. It will be depreciated on a straight-line basis
over ten years, after which it has no salvage value. You expect
that the new machine will contribute EBITDA (earnings before
interest, taxes, depreciation, and amortization) of $ 55,000 per
year for the next ten years. The...
One year ago, your company purchased a machine used in manufacturing for $ 115,000 . You...
One year ago, your company purchased a machine used in
manufacturing for $ 115,000 . You have learned that a new machine
is available that offers many advantages and you can purchase it
for $ 170,000 today. It will be depreciated on a straight-line
basis over 10 years and has no salvage value. You expect that the
new machine will produce a gross margin (revenues minus operating
expenses other than depreciation) of $ 35,000 per year for the
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for$140,000today. It will be depreciated on a straight-line basis
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expenses other than depreciation) of$35,000per year for the next
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available that offers many advantages; you can purchase it for
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over ten years, after which it has no salvage value. You expect
that the new machine will contribute EBITDA (earnings before
interest, taxes, depreciation, and amortization) of $40,000 per
year for the next ten years. The current machine is...
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available that offers many advantages; you can purchase it for
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over ten years, after which it has no salvage value. You expect
that the new machine will contribute EBITDA (earnings before
interest, taxes, depreciation, and amortization) of $40,000 per
year for the next ten years. The current machine is...
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manufacturing for $90,000. You have learned that a new machine is
available that offers many advantages and that you can purchase it
for $150,000 today. The CCA rate applicable to both
machines is 30%?; neither machine will have any? long-term salvage
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One year? ago, your company purchased a machine used in manufacturing for $105,000. You have learned...
One year? ago, your company purchased a machine used in
manufacturing for $105,000. You have learned that a new machine is
available that offers many advantages and that you can purchase it
for $160,000 today. The CCA rate applicable to both
machines is 20%?; neither machine will have any? long-term salvage
value. You expect that the new machine will produce earnings
before? interest, taxes,? depreciation, and amortization
(EBITDA?) of $50,000 per year for the next ten years. The
current machine...
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