Question

Replacement Analysis

The Everly Equipment Company's flange-lipping machine was purchased 5 years ago for $75,000. It had an expected life of 10 years when it was bought and its remaining depreciation is $7,500 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 $150,000, 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 25%, and the appropriate cost of capital is 15%.

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?

   -Select-YesNo

Answer 1

Solution :

Dear student in the given question company Everly Equipement in this question is looking to change an old machine with the new machine so following are the steps to be taken:

Step 1: Computation of total cash outflow in year 0

Particulars	Amount($)	Explanation
New machine cost	150000
less: Sale of old machine	(50000)
add:Profit on sale of machine	3125	refer to note below
Cash outflow	103125

Note:

Cost of machinery(old) :$75000

Expected Life :10years

Depereciation =7500 per year

Remaing value of machine: =7500per year * remaining year=7500*5=$37,500

Profit on sale of machine =( Machine selling price -remaing value of machine)*rate of tax

=$50000-37500*25% =3125

Step 2:Computation of present value of cash inflow

Value of incremental cash flow cash inflow

Change in operating expense=$45000*(1-0.25)=$33,750

year	Change in operating expense *(1-0.25)	Depericiation*tax@25%	Incrementalcash flow
1	33750	13332	47082
2	33750	17780	51530
3	33750	5924	39674
4	33750	3124	36874
5	33750	-	33750

present value of incremental cash flows =$47082/(1.15)+51530/(1.15)2+39674/(1.15)3 +36874(1.15)4+33750(1.15)5

=151440.07

Note :

Cost of capital is @15%

Step : 3 Net Present Value of this project

NPV= PRESENT VALUE OF CASH INFLOW OF PROJECT- PRESENT VALUE OF CASH OUTFLOW

=$151440.07- $103125= + $48315

Step 5:

Since the NPV of the project is positive so this project can be accepted. so the answer is yes