Question

In: Finance

9) Global company is considering replacing one of its equipment with a more efficient one. The...

9) Global company is considering replacing one of its equipment with a more efficient one. The old machine has a book value of $60,000 and a remaining useful life of 5 years. It can sell the old machine now for $ 265,000. The old machine is being depreciated by 120,000 per year straight line. The new machine has a purchase price of $ 1,175,000 an estimated useful life and 5 years MACRS class life and salvage value of $145,000. Annual economic savings is $255,000 if new machine is installed. Taxes 40% and WACC is 12%.

a. Calculate the initial cash flow at time 0, which is today.

b. Calculate the cash flows for years 1 thru 5.

c. Calculate the terminal value at year 5

d. Calculate the NPV and IRR of the project and make a decision on whether the company should accept or reject the investment and why?

Solutions

Expert Solution

a) After tax value of old machine = 265000-(265000-60000)*40%
= 183000
Cash outflow today = 1,175,000-183,000
= 992000
b) Calculation of Depreciation
Year 1 2 3 4 5 6 (WDV )  
Rate 20% 32% 19.20% 11.52% 11.52% 5.72%
Cost 1,175,000 1,175,000 1,175,000 1,175,000 1,175,000 1,175,000
Dep 235000 376000 225600 135360 135360 67210
Calculation of cash flow
Year 1 2 3 4 5 total
saving 255000 255000 255000 255000 255000
dep 235000 376000 225600 135360 135360
profit before tax 20000 -121000 29400 119640 119640
tax 8000 -48400 11760 47856 47856
profit after tax 12000 -72600 17640 71784 71784
Cash flow 247000 303400 243240 207144 207144
PVF @ 12% 0.8929 0.7972 0.7118 0.6355 0.5674
Discounted CF 220535.7 241868.6 173133.4 131643.8 117539.1 884720.6
c)
WDV at year 5 (dep for year 6) = 67210
After tax salvage value of machine after 5 years = 145000-(145000-67210)*40%
113884
PV of salvage value today = 113884*0.5674
= 64617.78
d) NPV = Dicounted CF+PV of terminal CF-cash outflow At year 0
= 884720.6+64617.78-992000
= -42661.62
IRR = 10.2673%
Company should reject the project as NPV is negative or IRR is less than WACC

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

Global company is considering replacing one of its equipment with a more efficient one. The old...
Global company is considering replacing one of its equipment with a more efficient one. The old machine has a book value of $60,000 and a remaining useful life of 5 years. It can sell the old machine now for $ 265,000. The old machine is being depreciated by 120,000 per year straight line. The new machine has a purchase price of $ 1,175,000 an estimated useful life and 5 years MACRS class life and salvage value of $145,000. Annual economic...
Global company is considering replacing one of its equipment with a more efficient one. The old...
Global company is considering replacing one of its equipment with a more efficient one. The old machine has a book value of $60,000 and a remaining useful life of 5 years. It can sell the old machine now for $ 265,000. The old machine is being depreciated by 120,000 per year straight line. The new machine has a purchase price of $ 1,175,000 an estimated useful life and 5 years MACRS class life and salvage value of $145,000. Annual economic...
The great tech company is considering replacing one of its machines with a more efficient one....
The great tech company is considering replacing one of its machines with a more efficient one. The old machine has a book value of $60,000 and a remaining useful life of 5 years. It can sell the old machine now for $ 265,000. The old machine is being depreciated by 120,000 per year straight line. The new machine has a purchase price of $ 1,175,000 an estimated useful life and 5 years MACRS class life and salvage value of $145,000....
Bottle Limited is considering replacing its current bottling machine with a newer and more efficient one....
Bottle Limited is considering replacing its current bottling machine with a newer and more efficient one. The current machine has a book value of $25,000 and has 5 years useful life remaining. If it was sold now the firm could raise $25,000. The price to purchase a new machine is $240,000, and shipping and installation costs would be $10,000. Estimated useful life of the new machine is 5 years, and at the end of its useful life it is estimated...
A small factory is considering replacing its existing coining press with a newer, more efficient one....
A small factory is considering replacing its existing coining press with a newer, more efficient one. The existing press was purchased three years ago at a cost of $510,000, and it is being fully depreciated according to a 7-year MACRS depreciation schedule and you have taken 3 years of depreciation on the old machine. The CFO estimates that the existing press has 6 years of useful life remaining. The purchase price for the new press is $675,000. The installation of...
FINE WOOD MACHINING IS CONSIDERING REPLACING AN EXISTING LATHE WITH A MORE EFFICIENT LATH. THE NEW...
FINE WOOD MACHINING IS CONSIDERING REPLACING AN EXISTING LATHE WITH A MORE EFFICIENT LATH. THE NEW LATHE COST $55,000 AND REQUIRES $5,000 IN INSTALLATION COST. THE OLD LATHE WAS PURCHASED 2 YEARS AGO FOR AN INSTALLED COST OF $35,000 AND HAS A BOOK VALUE OF $16,800. IT CAN BE SOLD TODAY FOR $20,000. ASSUME THE NEW MACHINE INCREASES WORKING CAPITAL BY $2,000. THE FIRM IS IN THE 21% TAX BRACKET. THE NEW MACHINE WILL PROVIDE $15,000/YEAR OF INCREMENTAL OPERATING CASH...
Burton, a manufacturer of snowboards, is considering replacing an existing piece of equipment with a more...
Burton, a manufacturer of snowboards, is considering replacing an existing piece of equipment with a more sophisticated machine. The following information is given. · The proposed machine will cost $120,000 and have installation costs of $20,000. It will be depreciated using a 3 year MACRS recovery schedule. It can be sold for $60,000 after three years of use (before tax; at the end of year 3). The existing machine was purchased two years ago for $95,000 (including installation). It is...
To decrease production costs, a company suggests replacing one of its manufacturing equipment with a newer,...
To decrease production costs, a company suggests replacing one of its manufacturing equipment with a newer, more efficient model. This four year project will result in reduced manufacturing costs which, in turn, would allow a reduction in the price of its finished product. The current equipment can be sold today for $1,000,000 net. A brand-new equipment retails almost $3,250,000; however, it can be purchased for $3,000,000. Funding for this purchase will include proceeds from the sale of the old equipment....
A manufacturing company has some existing semiautomatic production equipment that it is considering replacing. This equipment...
A manufacturing company has some existing semiautomatic production equipment that it is considering replacing. This equipment has a present MV of $55,000 and a BV of $27,000. It has five more years of depreciation available under MACRS​ (ADS) of $6,000 per year for four years and $3,000 in year five. (The original recovery period was nine​ years.) The estimated MV of the equipment five years from now is $19,000. The total annual operating and maintenance expenses are averaging $27,000 per...
A company is considering whether to replace one of its construction equipment. • The existing equipment...
A company is considering whether to replace one of its construction equipment. • The existing equipment has a current cost of $15,000, which declines by 20% each year for three years. The operating cost for this equipment is $20,000 for year 1, $8,000 for year 2, and $12,000 for year 3. • The proposed equipment will cost $50,000, last five years, and has a market value that declines by 20% each year. The operating cost for the proposed equipment is...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT