Question

The Everly Equipment Company's flange-lipping machine was purchased 5 years ago for $100,000. It had an expected life of 10 years when it was bought and its remaining depreciation is $10,000 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 $140,000, including installation costs. During its 5-year life, it will reduce cash operating expenses by $50,000 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 $55,000. The firm's tax rate is 35%, and the appropriate cost of capital is 14%.

A. f the new flange-lipper is purchased, what is the amount of the initial cash flow at Year 0? Round your answer to the nearest whole dollar.

B. 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 whole dollar.

C. What is the NPV of this project? Do not round intermediate calculations. Round your answer to the nearest whole dollar.

Answer 1

Time line		0	1	2	3	4	5
Proceeds from sale of existing asset	=selling price* ( 1 -tax rate)	35750
Tax shield on existing asset book value	=Book value * tax rate	17500
Cost of new machine		-140000
=a. Initial Investment outlay		-86750
3 years MACR rate			33.33%	44.45%	14.81%	7.41%	0.00%
Savings			50000	50000	50000	50000	50000
Operating cost			0	0	0	0	0
-Depreciation	=Cost of machine*MACR%		-46662	-62230	-20734	-10374	0
=Pretax cash flows			3338	-12230	29266	39626	50000
-taxes	=(Pretax cash flows)*(1-tax)		2169.7	-7949.5	19022.9	25756.9	32500
+Depreciation			46662	62230	20734	10374	0
=after tax operating cash flow			48832	54281	39757	36131	32500
+Tax shield on salvage book value	=Salvage value * tax rate						0
=b. Terminal year after tax cash flows							0
Total Cash flow for the period		-86750	48832	54281	39757	36131	32500
Discount factor=	(1+discount rate)^corresponding period	1	1.14	1.2996	1.481544	1.68896016	1.9254146
Discounted CF=	Cashflow/discount factor	-86750	42834.82456	41767.0822	26834.7751	21392.3933	16879.482
c. NPV=	Sum of discounted CF=	62959