Question

Relevant cash flows—No terminal value   Central Laundry and Cleaners is considering replacing an existing piece of machinery with a more sophisticated machine. The old machine was purchased 3 years ago at a cost of $54,300​, and this amount was being depreciated under MACRS using a​ 5-year recovery period. The machine has 5 years of usable life remaining. The new machine that is being considered costs $76,200 and requires $4,200 in installation costs. The new machine would be depreciated under MACRS using a​ 5-year recovery period. The firm can currently sell the old machine for $54,800 without incurring any removal or cleanup costs. The firm is subject to a tax rate of 40%. The revenues and expenses​ (excluding depreciation and​ interest) associated with the new and the old machines for the next 5 years aregiven in the table

New machine			Old machine
Year	Revenue	Expenses ​(excluding depreciation and​ interest)		Revenue	Expenses ​(excluding depreciation and​ interest)
1	$749,400	$719,100		$673,400	$659,800
2	749,400	719,100		675,400	659,800
3	749,400	719,100		679,400	659,800
4	749,400	719,100		677,400	659,800
5	749,400	719,100		673,400	659,800

. ​(Table

Percentage by recovery​ year*
Recovery year	3 years	5 years	7 years	10 years
1	33​%	20​%	14​%	10​%
2	45​%	32​%	25​%	18​%
3	15​%	19​%	18​%	14​%
4	7​%	12​%	12​%	12​%
5		12​%	9​%	9​%
6		5​%	9​%	8​%
7			9​%	7​%
8			4​%	6​%
9				6​%
10				6​%
11				4​%
Totals	100​%	100​%	100​%	100​%

contains the applicable MACRS depreciation​ percentages.) Note: The new machine will have no terminal value at the end of 5 years.

a. Calculate the initial investment associated with replacement of the old machine by the new one.

b. Determine the incremental operating cash inflows associated with the proposed replacement.​ (Note: Be sure to consider the depreciation in year​ 6.)

c. Depict on a time line the relevant cash flows found in parts ​(a​) and (b​) associated with the proposed replacement decision.

a. Calculate the initial investment associated with replacement of the old machine by the new one.

Calculate the initial investment​ below:  ​(Round to the nearest​ dollar.)

Cost of new asset	$	76,200
Installation costs		4,200
Total cost of new asset			$	80,400
Proceeds from sale of old asset	$	(54,800)
Tax on sale of old asset		15,621
Total proceeds, sale of old asset			$	(39,179)
Initial investment			$	41,221

b. Determine the incremental operating cash inflows associated with the proposed replacement.​ (Note: Be sure to consider the depreciation in year​ 6.)

Calculate the cash flows with the old machine​ below:  ​(Round to the nearest​ dollar.)

Answer 1

As solution to First Q has been given in solution related to calcuation of initial investment.I am givving solution to other part.

Since new machine on replacement of old machine has an outflow of $ 41,221 as per calculation in Q.

CAsh flow from old machine in various year are as follows:(Excluding depreciation )

old machine
year	1	2	3	4	5	6	7	8
Cost /opening balance	54300	43440	26064	15747	9231	2715	0	0
Depreciation under MACRS	10860	17376	10317	6516	6516	2715
Closing balance	43440	26064	15747	9231	2715	0	0	0
Revenue generated by it				673400	675400	679400	677400	673400
Expenses to generate revenue				659800	659800	659800	659800	659800
Net inflow/(outflow)				13600	15600	19600	17600	13600
Incremental inflow					0.15	0.26	-0.10	-0.23

Since entity has used the asset for three years , no values are posted in its inital year.

b) Incremental operating cash inflow(under propsed replacement) details are as

Under proposed replacement
Year	1	2	3	4	5
Initial investment i.e outflow	41221
Revenue from new machine	749400	749400	749400	749400	749400
Expenses related to new machine	719100	719100	719100	719100	719100
Operating cash inflow	-10921	30300	30300	30300	30300
Incremental operating cash inflow		-3.77	0.00	0.00	0.00

on comparison of cash flows of both of them,

old machine VS new machine
Revenue by old machine(B)	673400	675400	679400	677400	673400
Revenue by New machine(A)	749400	749400	749400	749400	749400
Diff C=A-B	76000	74000	70000	72000	76000
Expenses by old machine(Y)	659800	659800	659800	659800	659800
Expenses by New machine (X)	719100	719100	719100	719100	719100
Diff D=X-Y	59300	59300	59300	59300	59300
Net Diff (C-D)	16700	14700	10700	12700	16700

We can see, its beneficial to have old machine replaced.

c) Depiction in year wise has been made as above.

In case of any Query , please comment on the same.