ABC Company is considering replacing its machine with a newer one. The old machine has a book value of $661,842 with a remaining life of 5 years.  It has been depreciated on a straight-line basis and can be sold now for $258,552. The new machine has a purchase price of $1,193,422 and an additional installation cost of $3,500.  At the time of replacement, the company will need an increase in net working capital of $11,000.  It has a 5-year MACRS class life with an estimated salvage value of $105,000 at the end of year 6.  The applicable depreciation rates are 20.00%, 32.00%, 19.20%, 11.52%, 11.52%, and 5.76%. The new machine is expected to generate an annual savings of $250,000 in operating costs.  The company's tax rate is 35%, and the project cost of capital is 14%.  What is the initial net cash flow in YEAR 0 if the company purchases the new machine to replace the old one, which is sold right away?  Round your answer to the nearest dollar, but do not enter $ in your answer. If your answer is negative, add "-" sign for the answer, e.g., xxx,xxx or -xxx,xxx. (Hint: Identify the relevant cash flow items first and then dollar amounts for Year 0.)

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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ABC Company is considering replacing its machine with a newer one. The old machine has a book value of $661,842 with a remaining life of 5 years.  It has been depreciated on a straight-line basis and can be sold now for $258,552.

The new machine has a purchase price of $1,193,422 and an additional installation cost of $3,500.  At the time of replacement, the company will need an increase in net working capital of $11,000.  It has a 5-year MACRS class life with an estimated salvage value of $105,000 at the end of year 6.  The applicable depreciation rates are 20.00%, 32.00%, 19.20%, 11.52%, 11.52%, and 5.76%. The new machine is expected to generate an annual savings of $250,000 in operating costs.  The company's tax rate is 35%, and the project cost of capital is 14%. 

What is the initial net cash flow in YEAR 0 if the company purchases the new machine to replace the old one, which is sold right away?  Round your answer to the nearest dollar, but do not enter $ in your answer. If your answer is negative, add "-" sign for the answer, e.g., xxx,xxx or -xxx,xxx. (Hint: Identify the relevant cash flow items first and then dollar amounts for Year 0.)

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