Question

The Everly Equipment Company's flange-lipping machine was purchased 5 years ago for $45,000. It had an expected life of 10 years when it was bought and its remaining depreciation is $4,500 per year for each year of its remaining life. As 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 $160,000, including installation costs. During its 5-year life, it will reduce cash operating expenses by $35,000 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 $45,000. The firm's tax rate is 25%, and the appropriate cost of capital is 12%.

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 dollar. Cash outflow, if any, should be indicated by a minus sign.

   $  

2. What are the incremental net cash flows that will occur at the end of Years 1 through 5? Do not round intermediate calculations. Round your answers to the nearest dollar. Cash outflows, if any, should be indicated by a minus sign.

   CF1	$
   CF2	$
   CF3	$
   CF4	$
   CF5	$

3. What is the NPV of this project? Do not round intermediate calculations. Round your answer to the nearest whole dollar. Negative value, if any, should be indicated by a minus sign.

   $  

   Should Everly replace the flange-lipper?

Answer 1

Part a : Initial Cash Flow at Year 0

Net Cash Outflow in year 0 = Cost of New Machine - Sales value of Old Machine

= $160,000 - $ 45,000

Net Cash Outflow in year 0 = $1,15,000

Part b : Incremental cash Flows from Year 1 to Year 5

Year	Cash Flow	Depreciation	Tax saving on depreciation	Net Cash Inflow
a	b	c	d=c*.25	e=b+d
1	$35,000.00	$53,330.00	$13,332.50	$48,333
2	$35,000.00	$71,120.00	$17,780.00	$52,780
3	$35,000.00	$23,695.00	$5,923.75	$40,924
4	$35,000.00	$11,855.00	$2,963.75	$37,964
5	$35,000.00	$0.00	$0.00	$35,000

Part C : NPV of the project

Year	Cash Flow	Depreciation	Tax saving on depreciation	Net Cash flow	PVF @ 12%	Present Value
a	b	c	d=c*.25	e=b+d	f	g=e*f
0	-$115,000.00	$0.00	$0.00	-$115,000	1	-$115,000
1	$35,000.00	$53,330.00	$13,332.50	$48,333	0.893	$43,154
2	$35,000.00	$71,120.00	$17,780.00	$52,780	0.797	$42,076
3	$35,000.00	$23,695.00	$5,923.75	$40,924	0.712	$29,129
4	$35,000.00	$11,855.00	$2,963.75	$37,964	0.636	$24,127
5	$35,000.00	$0.00	$0.00	$35,000	0.567	$19,860
					NPV	$43,345

Based on the above table, we can conclude that since the NPV of the project is positive, therefore the machine should be replaced.

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