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In: Finance

This is the exact post of the assignment i double checked the numbers and everything is...

This is the exact post of the assignment i double checked the numbers and everything is correct

Tough Steel, Inc. is a processor of stainless steel products. The firm is considering replacing an old stainless steel tube-making machine for a more cost-effective machine that can meet the firm’s quality standards

 The old machine was acquired 2 years ago at an installed cost of $500,000. It has been depreciated under the MACRS’s 5-year recovery period, and has a remaining economic life of 5 years. It can be sold today for $350,000 before taxes, but if the firm decides to keep it, it can be sold for $100,000 before taxes at the end of year 5.

 The first option is Machine A, which can be purchased for $600,000, but will require $30,000 in installation costs. This machine would be depreciated under the MACRS’s 3- year recovery period. At the end of its economic life, the machine will have a salvage value of $350,000 before taxes. This machine would require an investment in net working capital of $100,000.

 The second option is Machine B, which can be purchased for $550,000, but requires $20,000 in installation costs. This machine would be depreciated under the MACRS’s 5- year recovery period. At the end of its economic life, the machine would have a salvage value of $330,000 before taxes. This machine requires no investment in net working capital.

The firm has estimated the following EBIT for all three machines: EBIT Year Old machine Machine A Machine B 1 $90,000 $90,000 $120,000 2 $90,000 $10,000 $20,000 3 $120,000 $150,000 $120,000 4 $150,000 $230,000 $200,000 5 $150,000 $270,000 $200,000

The firm’s WACC is 14% and its tax rate is 40%.

a) Calculate the following cash flows for the old machine, machine A, and machine B:

 initial investment,

 annual after-tax cash flows for each year, and

 the terminal cash flow.

b) Determine which machine is more profitable for the company based on

 the payback period,

 discounted payback period,

 net present value,

 profitability index,

 internal rate of return, and

 modified internal rate of return.

Expert Solution

jeff jeffy answered 1 year ago

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