Old Machine Price Salvage for Depreciation Original Life 75,000 0 New Machine Difference 215,000 0 Depreciation Schedules Class 5 10 5 Year 1 Current Life 5 5 New Current Salvage Value 40,000 0 Old Expected Salvage Value 0 30,000 Depreciation Method Straight-line MACRS 7 7 Difference 7,500 7.500 7500 35,500 61,300 33,780 Depreciable Base 215,000 5 43,000 68,800 41,280 24,768 24,768 7,500 7,500 17,268 17.268 2 3 Depreciation Depreciable Life Book Value 7,500 10 37,000 5 (29,500)) 37,500 215,000 Energy Savings Salary Savings Tax Rate 6,000 68,000 WACC 25% 9.50% Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Initial Investment Cost of Machine (215,000) After-tax value of old machine 39,375 Net Investment (175,625) Annual Savings 74,000 74,000 74.000 74,000 74,000 Depreciation 29,500 29,500 29,500 29,500 29.500 Pre-Tax Operation Income 44,500 44,500 44,500 44,500 44,500 Taxes 11,125 11,125 11,125 11,125 11,125 Add: Depreciation After-tax Operating Cash Flow Operating Cash Flows 29.500 29.500 29.500 29.500 29,500 33,375 33,375 33,375 33,375 33,375 62,875 62,875 62,875 62,875 62,875 Terminal Value Salvage Value 30,000 Total After-tax Cash Flow (175,625) 62,875 62,875 62.875 62.875 92,875 Discount Factor Discount Cash Flows 1.00 (175,625) 0.91 57,420 0.83 52,438 0.76 47,889 0.70 43,734 0.64 58,997 Arroy Snackfoods is considering replacing a five-year-old machine that originally cost $75,000. It was being depreciated using straight-line to an expected salvage value of zero over its original 10-year life, and could now be sold for $40,000. The replacement machine would cost $215,000 and have a five-year expected life. It would be depreciated using the MACRS 5- year class life. The expected salvage value of this machine after 5 years is $30,000. The new machine is expected to operate much more efficiently, saving $6,000 per year in energy costs. In addition, it will eliminate one salaried position saving another $68,000 annually. The firm's marginal tax rate is 25% and the WACC is 9.5%. a. Set up an operating cash flow statement, and calculate the payback, discounted payback, NPV, IRR, and MIRR of the replacement project. Should the project be accepted? b. At what discount rate would you be indifferent between keeping the existing equipment and purchasing the new equipment?