Question

The Everly Equipment Company's flange-lipping machine was purchased 5 years ago for $80,000. It had an expected life of 10 years when it was bought and its remaining depreciation is $8,000 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 will reduce cash operating expenses by $50,000 per year, although it will not affect sales. At the end of its useful life, the high-efficiency 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 33.33%, 44.45%, 14.81%, and 7.41%.

The old machine can be sold today for $55,000. The firm's tax rate is 35%, and the appropriate cost of capital is 16%.

1. If the new flange-lipper is purchased, what is the amount of the initial cash flow at Year 0? Round your answer to the nearest whole dollar.
   $
2. 
   
3. 
   
4. 
   
5. What are the incremental net cash flows that will occur at the end of Years 1 through 5? Do not round intermediate calculations. Round your answers to the nearest whole dollar.

   CF1	$
   CF2	$
   CF3	$
   CF4	$
   CF5	$

6. 
   
7. What is the NPV of this project? Do not round intermediate calculations. Round your answer to the nearest whole dollar.

Answer 1

If the new flange-lipper is purchased, what is the amount of the initial cash flow at Year 0
Old machine sold	$          55,000
Less: Book value of old machine (80000-(8000*5))	$          40,000
Net profit on Sale of old machine	$          15,000
Multiply: Tax rate	35.00%
Tax on sale of old machine	$            5,250
Old machine sold	$          55,000
Less: Tax on sale of old machine	$            5,250
Net proceed from sale of old machine	$          49,750
Cost of new flange-lipper	$        140,000
Less: Net proceed from sale of old machine	$          49,750
Initial cash outflow at Year 0	$          90,250

Year	Depreciation rate	Depreciation on new machine (140000*Depreciation rate)	Depreciation on old machine	Incremental (Decremental) depreciation on new machine	Multiply: Tax rate	Tax shield on Incremental (Decremental) depreciation
1	33.33%	$               46,662	$                   8,000	$                38,662	35.00%	13,532
2	44.45%	$               62,230	$                   8,000	$                54,230	35.00%	18,981
3	14.81%	$               20,734	$                   8,000	$                12,734	35.00%	4,457
4	7.41%	$               10,374	$                   8,000	$                  2,374	35.00%	831
5			$                   8,000	$                (8,000)	35.00%	(2,800)

Cash flow	Decrease in operating cost	Add: Tax shield on Incremental (Decremental) depreciation	Cash inflow
Year 1	$          50,000	$               13,532	$                 63,532
Year 2	$          50,000	$               18,981	$                 68,981
Year 3	$          50,000	$                 4,457	$                 54,457
Year 4	$          50,000	$                     831	$                 50,831
Year 5	$          50,000	$               (2,800)	$                 47,200

Cash outflow present with minus sign.
Year	Cash flow	Discount Factor @ 16%
0	$        (90,250)	1.000000	$        (90,250.00)
1	$          63,532	0.862069	$           54,768.97
2	$          68,981	0.743163	$           51,264.12
3	$          54,457	0.640658	$           34,888.29
4	$          50,831	0.552291	$           28,073.51
5	$          47,200	0.476113	$           22,472.53
NPV of this project			$        101,217.42
NPV of this project (rounded)			$              101,217