Problem 11-13 Replacement Analysis The Everly Equipment Company\'s flange-lippin
ID: 2710821 • Letter: P
Question
Problem 11-13
Replacement Analysis
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 is being depreciated by the straight-line method by $8,000 per year. As the older flange-lippers are robust and useful machines, it 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 $150,000, including installation costs. During its 5-year life, it will reduce cash operating expenses by $45,000 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 $50,000. The firm's tax rate is 35%, and the appropriate WACC is 13%.
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.
$
What are the incremental net cash flows that will occur at the end of Years 1 through 5? Round your answers to the nearest whole dollar.
What is the NPV of this project? Round your answer to the nearest whole dollar.
$
Explanation / Answer
Purchase price for old machine 80000 depreciation for 5 yrs(5*8000) 40000 Current WDV 40000 Salvage value after 10 yrs 20000 Purchase price for New machine 150000 saving on operating exp per year 45000 If new machine is purchased today Initial cash flow Purchase price for New machine 150000 Less: cash inflow from old machine -50000 Tax on profit of sale of old machine 3500 New cashflow in year 0 103500 NOTE 1 Tax on sale of old machine Old Machine sale price 50000 WDV 40000 Profit 10000 Tax @ 35% 3500 Note 2 Calculation of change in depreciation 33.33% 44.45% 14.81% 7.41% 1 2 3 4 5 Dep of new machine 49995 66675 22215 11115 0 Dep of old machine 8000 8000 8000 8000 8000 change in dep 41995 58675 14215 3115 -8000 Increment cash flow statement 1 2 3 4 5 savings in operating cashflow 45000 45000 45000 45000 45000 Less chage in dep(Note 2) 41995 58675 14215 3115 -8000 3005 -13675 30785 41885 53000 Tax rate @35% 1051.75 -4786.25 10774.75 14659.75 18550 1953.25 -8888.75 20010.25 27225.25 34450 Add change in Depreciation 41995 58675 14215 3115 -8000 Increment cash flow 43948.25 49786.25 34225.25 30340.25 26450 Year cashflow discount rate @ 13% dis cashflow 0 -150000 1.000 -150000 1 43948 0.885 38894 2 49786 0.783 38983 3 34225 0.693 23718 4 30340 0.613 18599 5 26450 0.543 14362 NPV of the project -15444