Replacement Analysis The Everly Equipment Company\'s flange-lipping machine was
ID: 2744451 • Letter: R
Question
Replacement Analysis
The Everly Equipment Company's flange-lipping machine was purchased 5 years ago for $100,000. It had an expected life of 10 years when it was bought and is being depreciated by the straight-line method by $10,000 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 $160,000, 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 $50,000. The firm's tax rate is 35%, and the appropriate WACC is 12%.
A.) 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. $
B.) 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.
CF1 $
CF2 $
CF3 $
CF4 $
CF5 $
C.) What is the NPV of this project? Round your answer to the nearest whole dollar.
Explanation / Answer
A) Initial cash outlay at year 0 is $ 110,000
B) Incremental net cash flows,
C) The NPV of the project is $ 38,126
Working:
CF1 $ 45,332 CF2 $ 49,613 CF3 $ 38,202 CF4 $ 35,353 CF5 $ 32,500