Question

In: Finance

The Darlington Equipment Company purchased a machine 5 years ago at a cost of $95,000. The...

The Darlington Equipment Company purchased a machine 5 years ago at a cost of $95,000. The machine had an expected life of 10 years at the time of purchase, and it is being depreciated by the straight-line method by $9,500 per year. If the machine is not replaced, it can be sold for $10,000 at the end of its useful life.

A new machine can be purchased for $170,000, including installation costs. During its 5-year life, it will reduce cash operating expenses by $60,000 per year. Sales are not expected to change. At the end of its useful life, the 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%, 45%, 15%, and 7%.

The old machine can be sold today for $50,000. The firm's tax rate is 40%. The appropriate WACC is 9%.

  1. If the new machine is purchased, what is the amount of the initial cash flow at Year 0? Round your answer to the nearest dollar. Negative amount should be indicated by a minus sign.
    $
  2. What are the incremental net cash flows that will occur at the end of Years 1 through 5? Round your answers to the nearest dollar.
    Year 1 Year 2 Year 3 Year 4 Year 5
  3. What is the NPV of this project? Round your answer to the nearest cent. Negative amount should be indicated by a minus sign.

Solutions

Expert Solution

Old machine book value

Book value = (purchase price)*remaining life/total life
= (95000)*5/10
= 47500
Time line 0 1 2 3 4 5
Proceeds from sale of existing asset =selling price* ( 1 -tax rate) 30000
Tax shield on existing asset book value =Book value * tax rate 19000
Cost of new machine -170000
=a. Initial Investment outlay -121000
3 years MACR rate 33.00% 45.00% 15.00% 7.00% 0.00%
Savings 60000 60000 60000 60000 60000
-Depreciation =Cost of machine*MACR% -56100 -76500 -25500 -11900 0
=Pretax cash flows 3900 -16500 34500 48100 60000
-taxes =(Pretax cash flows)*(1-tax) 2340 -9900 20700 28860 36000
+Depreciation 56100 76500 25500 11900 0
=after tax operating cash flow 58440 66600 46200 40760 36000
+Tax shield on salvage book value =Salvage value * tax rate 0
=Terminal year after tax cash flows 0
b. Total Cash flow for the period -121000 58440 66600 46200 40760 36000
Discount factor= (1+discount rate)^corresponding period 1 1.09 1.1881 1.295029 1.4115816 1.538624
Discounted CF= Cashflow/discount factor -121000 53614.6789 56055.888 35674.877 28875.412 23397.53
c. NPV= Sum of discounted CF= 76618.39

Related Solutions

The Darlington Equipment Company purchased a machine 5 years ago at a cost of $95,000. The...
The Darlington Equipment Company purchased a machine 5 years ago at a cost of $95,000. The machine had an expected life of 10 years at the time of purchase, and it is being depreciated by the straight-line method by $9,500 per year. If the machine is not replaced, it can be sold for $15,000 at the end of its useful life. A new machine can be purchased for $180,000, including installation costs. During its 5-year life, it will reduce cash...
The Darlington Equipment Company purchased a machine 5 years ago at a cost of $90,000. The...
The Darlington Equipment Company purchased a machine 5 years ago at a cost of $90,000. The machine had an expected life of 10 years at the time of purchase, and it is being depreciated by the straight-line method by $9,000 per year. If the machine is not replaced, it can be sold for $10,000 at the end of its useful life. A new machine can be purchased for $150,000, including installation costs. During its 5-year life, it will reduce cash...
The Darlington Equipment Company purchased a machine 5 years ago at a cost of $100,000. The...
The Darlington Equipment Company purchased a machine 5 years ago at a cost of $100,000. The machine had an expected life of 10 years at the time of purchase, and it is being depreciated by the straight-line method by $10,000 per year. If the machine is not replaced, it can be sold for $10,000 at the end of its useful life. A new machine can be purchased for $160,000, including installation costs. During its 5-year life, it will reduce cash...
The Darlington Equipment Company purchased a machine 5 years ago at a cost of $100,000. The...
The Darlington Equipment Company purchased a machine 5 years ago at a cost of $100,000. The machine had an expected life of 10 years at the time of purchase, and it is being depreciated by the straight-line method by $10,000 per year. If the machine is not replaced, it can be sold for $10,000 at the end of its useful life. A new machine can be purchased for $170,000, including installation costs. During its 5-year life, it will reduce cash...
The Darlington Equipment Company purchased a machine 5 years ago at a cost of $80,000. The...
The Darlington Equipment Company purchased a machine 5 years ago at a cost of $80,000. The machine had an expected life of 10 years at the time of purchase, and it is being depreciated by the straight-line method by $8,000 per year. If the machine is not replaced, it can be sold for $5,000 at the end of its useful life. A new machine can be purchased for $150,000, including installation costs. During its 5-year life, it will reduce cash...
REPLACEMENT ANALYSIS The Darlington Equipment Company purchased a machine 5 years ago at a cost of...
REPLACEMENT ANALYSIS The Darlington Equipment Company purchased a machine 5 years ago at a cost of $80,000. The machine had an expected life of 10 years at the time of purchase, and it is being depreciated by the straight-line method by $8,000 per year. If the machine is not replaced, it can be sold for $5,000 at the end of its useful life. A new machine can be purchased for $180,000, including installation costs. During its 5-year life, it will...
XYZ purchased a machine 5 years ago at a cost of $95,000. The machine had an...
XYZ purchased a machine 5 years ago at a cost of $95,000. The machine had an expected life of 10 years at the time of purchase, and it is being depreciated by the straight-line method by $9,500 per year. If the machine is not replaced, it can be sold for $11,000 at the end of its useful life. A new machine can be purchased for $170,000, including installation costs. During its 5-year life, it will reduce cash operating expenses by...
Atlantic Control Company purchased a machine 2 years ago at a cost of $70,000. The machine...
Atlantic Control Company purchased a machine 2 years ago at a cost of $70,000. The machine is being depreciated using simplified straight-line over its 7-year class life. The machine would have no salvage value at the end of year 7, but could be sold now for $40,000. A new replacement machine can be purchased for $80,000. The new machine would be depreciated over 5 years. Rapidly changing technology has necessitated this project. Delivery and installation charges will amount to $10,000...
The Everly Equipment Company’s flange-lipping machine was purchased 5 years ago for $55,000. It had an...
The Everly Equipment Company’s flange-lipping machine was purchased 5 years ago for $55,000. It had an expected life of 10 years when it was bought and its remaining depreciation is $5,500 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 $120,000, including installation costs. During its 5-year life, it...
The Everly Equipment Company's flange-lipping machine was purchased 5 years ago for $55,000. It had an...
The Everly Equipment Company's flange-lipping machine was purchased 5 years ago for $55,000. It had an expected life of 10 years when it was bought and its remaining depreciation is $5,500 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...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT