Replacement Analysis XYM Corp is considering replacing their old robot. The robo
ID: 2655182 • Letter: R
Question
Replacement Analysis
XYM Corp is considering replacing their old robot. The robot, purchased just 2 years ago, is being depreciated on a straight-line basis and has 6 years of remaining life. It currently has a book value of $2,400. It has a current salvage value of $4,500. Thus, the annual depreciation expense is $2,400/6=$400 per year. If the old robot is not replaced, it can be sold for $800 at the end of its useful life.
XYM Corp. is considering purchasing a newer robot, which costs $7,900, and has an estimated useful life of 6-years with an estimated salvage value of $790. This robot falls into the MACRS 5-years class, so the applicable depreciation rates are 20.00%, 32.00%, 19.20%, 11.52%, 11.52%, and 5.76%. The new robot is faster and would allow for an output expansion, so sales would rise by $2,000 per year; even so, the new machine's much greater efficiency would reduce operating expenses by $1,400 per year. To support the greater sales, the new machine would require that inventories increase by $2,900, but accounts payable would simultaneously increase by $700. XYM’s marginal tax rate is 40%, and its WACC is 13%.
A) Based on this information, Should the old robot be replaced?
B) What is the NPV of the project?
Explanation / Answer
Yes old Robot be replaced NPV is $5,269.7051 Statement showing calculation of Profitability Index Particulars Time PVF@13% Amount PV(Amount *PVF) Cash Outflows(Invt in project) - 1.0000 (7,900.000) (7,900.00) Increase in WC(2900-700) - 1.0000 (2,200.000) (2,200.00) Salvage value of old Robot - 1.0000 3,660.000 3,660.00 PV of Cash Outflows - (6,440.00) Annual Cash Flows 1.000 0.8850 2,653.2000 2,347.96 Annual Cash Flows 2.000 0.7831 3,165.1200 2,478.75 Annual Cash Flows 3.000 0.6931 2,619.0720 1,815.15 Annual Cash Flows 4.000 0.6133 2,291.4432 1,405.39 Annual Cash Flows 5.000 0.5428 2,291.4432 1,243.70 Annual Cash Flows 6.000 0.4803 2,045.7216 982.60 Working Capital 6.000 0.4803 2,200.0000 1,056.70 Salvage Value 6.000 0.4803 790.0000 379.45 PV of Cash Inflows 11,709.71 NPV 5,269.7051 Sale Value 4,500.000 Book Value 2,400.000 Gain(4500-2400) 2,100.000 Tax@40% on Gain 840.000 Net Salvage value(net of tax)(4500-840) 3,660.000 Particulars Year1 Year2 Year3 Year4 Year5 Year6 Depreciation Rates 20.00% 32.00% 19.20% 11.52% 11.52% 5.76% Depreciation on 7900-790 1,422.000 2,275.200 1,365.120 819.072 819.072 409.536 Earlier Depreciation 400.000 400.000 400.000 400.000 400.000 400.000 Incremental Depreciation 1,022.000 1,875.200 965.120 419.072 419.072 9.536 Tax@40% 408.800 750.080 386.048 167.629 167.629 3.814 Tax Savings on Depreciation 613.200 1,125.120 579.072 251.443 251.443 5.722 Particulars Year1 Year2 Year3 Year4 Year5 Year6 Increase in Sales 2000.00 2000.00 2000.00 2000.00 2000.00 2000.00 Reduce In Operating Exp 1,400.000 1,400.000 1,400.000 1,400.000 1,400.000 1,400.000 Net Benefits 3,400.000 3,400.000 3,400.000 3,400.000 3,400.000 3,400.000 Tax@40% 1,360.000 1,360.000 1,360.000 1,360.000 1,360.000 1,360.000 Net Benefit after Tax 2,040.000 2,040.000 2,040.000 2,040.000 2,040.000 2,040.000 Tax Savings on Depreciation 613.200 1,125.1200 579.0720 251.4432 251.4432 5.722 Total Benefits 2,653.200 3,165.120 2,619.072 2,291.443 2,291.443 2,045.722