Question
In: Finance
Problem 3 A Company is contemplating the replacement of an old machine with newer and more...
Problem 3
A Company is contemplating the replacement of an old machine with newer and more efficient one. The old machine has a book value of $600,000 and a remaining useful life of 5 years. The firm expects to sell this old machine for $75,000 in 5 years, but also it can sell it now to another firm in the industry for $265,000. The old machine is being depreciated by $120,000 per year using the straight-line method. The new machine has a purchase price of $1,175,000, an estimated useful life and MACRS class life of 5 years, and an estimated selling price of $145,000 at the end of the 5th year. T(MACRS 5- years rates are 20%,32%,19%,12%,11%, and 6%). The machine is expected to economize on electric power usage, labor, and repair costs as well as to reduce the number of defective bottles. In total, an annual savings of $255,000 will be realized if the new machine is installed. The company's marginal tax rate is 35%, and it has a 12% WACC.
a) What is cash flow 0?
b) What are the cash flows for years 1 to 5 to be used in NPV calculations?
c) Should the firm replace the old machine?
Solutions
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