Use the following information to answer the questions.Please show the work steps
ID: 2615658 • Letter: U
Question
Use the following information to answer the questions.Please show the work steps.
Old machine
Original purchase price $555000
Original life 10 years
Remaining life 5 years
Straight line depreciation in use
Salvage value $50000
Current fair market value $260000
New Machine A
Purchase price $895000
Estimated life 5 years
Straight line Depreciation
Astimated salvage vlue $10000
Estimated Net operating Cash flow increase/decrease (Prior to depreciation and taxes)
End of year 1 $100000
End of yera 2 $150000
End of year 3 $250000
End of year 4 $200000
End of year 5 $200000
Assumption
Tax rate 40%
WACC rate 7%
What is the NVP if you keep the old machine?
What is the NVP if you sell the old machine and buy new machine A?
What decision do you suggest?
a. Keep the old machine and do not buy the new mahine
b. Sell the old machine and buy the new machine
The cash flow creating the least amount of risk or the cash cash flow we should be cartain of is:
a. The cost of the new machine
b. The project cash flow saving in year 4
c. The tax benefit from the depreciation
d. The salvage value on the new machine
Explanation / Answer
NPV of selling old and buying new = 112659-118743 = 5815
Since NPV of selling old machine and buying new is negative, the decision should be to keep old machine and donot buy new machine
The cash flow creating the least amount of risk or the cash cash flow we should be cartain of is: The tax benefir from depreciation
Keep the Old Machine Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Depreciation for remaining years ((555000-50000)/10)*0.4 20,200 20,200 20,200 20,200 20,200 Salvage Value 50,000 Net Cashflows (A) - 20,200 20,200 20,200 20,200 70,200 WACC Rate 7% (B) 1 0.93 0.87 0.82 0.76 0.71 (1/1.07) (0.93/1.07) (0.87/1.07) (0.82/1.07) (0.76/1.07) PV of Cashflows (C=A*B) - 18,879 17,643 16,489 15,410 50,052 NPV (sum of C) 118,473