A Plastic company, Inc., Plastic grading company and Plastic extraction, is cons
ID: 2724732 • Letter: A
Question
A Plastic company, Inc., Plastic grading company and Plastic extraction, is considering replacing an existing piece of equipment with a more sophisticated machine. The following information is given as of today. Table one: Facts Existing Machine proposed machine costs 115,000.00 165000.00 installation 10,000 20,000 MACRS 5 - years 5 - Years Market Value 105,000.00 Purchased 2 years ago. Table two: forecasted revenues year Existing Machine Proposed Machine year 1 160,000 170,000 2 year 150,000 170,000 3year 140,000 170,000 4 year 140,000 170,000 5 year 140,000 170,000 another table: Forecasted Expenses (No Depreciation) year Existing Machine Proposed Machine Year 1 104,000 110,500 2 year 104,000 110,500 3 year 104,000 110,500 4 year 104,000 110,500 5year 104,000 110,500 The firm pays 40 percent taxes on ordinary income and capital gains. A. Given the information in Table 1, compute the initial investment. B. Given the information in Table 2, compute the incremental annual cash flows. C. Given the information from Table 1, assuming 12% rate of return, what is Plastic Company’s Inc. NPV on the proposed machine.
Explanation / Answer
A. Initial Investment on Proposed Machine = 165000+20000 185000 B. Incremental Annual Cash Flows Existing Proposed Incremental Cash Flows Revenue Expense Net Inflow Revenue Expense Net Inflow 160000 104000 56000 170000 110500 59500 3500 150000 104000 46000 170000 110500 59500 13500 140000 104000 36000 170000 110500 59500 23500 140000 104000 36000 170000 110500 59500 23500 140000 104000 36000 170000 110500 59500 23500 C. Calculation of NPV on Proposed Machine Year Cash Flows PVF @12% PV 0 -185000 1 -185000.00 1 35700 0.8929 31875.00 2 35700 0.7972 28460.04 3 35700 0.7118 25411.26 4 35700 0.6355 22687.35 5 35700 0.5674 20256.18 NPV -56310.17 WN : Net cash inflows on Proposed machine Net Income Tax Net Cash Flows 59500 23800 35700 59500 23800 35700 59500 23800 35700 59500 23800 35700 59500 23800 35700