Assume that it is January 1. 2022. and that the Mendoza Company is considering the replacement of a machine that has been used forthe past 3 years in a special project for the company. This project is expected to continue for an additional 5 years (i.e., until the end of2026). Mendoza will either keep the existing machine for another 5 years (8 years total) or replace the existing machine now with anew model that has a 5-year estimated life. Pertinent facts regarding this decision ere as followsPurchase price of machine (inc luding transportation, setupcharges, etc.)Useful life (determined at time of acquisition)Estimated salvage value, end of 2026Expected cash operating costs, per year:Variable (per unit produced/sold)Fixed costs (total)Estimated salvage (terminal) values:Janoary 1, 2022Decenber 31, 2026Net working capital connitted at time of acquisition ofexisting nachine (all fully recovered at end of project,Decenber 31, 2026)Incremental net working capital required if new aachine ispurchased on January 1, 2022 (all fully recovered at end ofproject, Decenber 31, 2026)Expected annual volume of output/sales (in units), over theperiod 2022 to 2026Keep Existing MachinePurchase New Machine$ 158,0008 years$ 20, 800$ 198,0005 years$ 25,800$0.33$ 0.27$ 24, 800$ 25,800$ 68, 800$ 13, 200$ 21,600$ 30, 800$ 10,800508,000soa, 000*Note: These amounts are used for depreciation calculations.Assume further that Mendoza is subject to a 40% income tax, for both ordinary income and gains/losses associated with disposal ofmachinery, end that ell cash flows occur at the end of the year. except for the initial investment. Assume that straight-line depreciationis used for tax purposes and that any tax essociated with the disposal of mechinery occurs at the same time as the related transection.Required:1. Determine relevant cash flows (efter-tax) at the time of purchase of the new machine (ie, time 0: Januery 1, 2022)2 Determine the relevant (after-tax) cash inflow each year of project operation (i.e, at the encl of each of years 1 through 5)3. Determine the relevant (after-tax) cash inflow at the end of the project's life (i.e., at the project's disposal time. December 31, 2026)5. Determine the undiscounted net cash flow (after tax) for the new machine and determine whether, on this basis, the old machineshould be replaced(For all requirements, do not round intermediate calculations. round your answers to the nearest whole dollar amount.)1 Net cash fow (after tax), tme 0 (1e at puchase pont)2 Net cash intiow (atter tax), during the propect operationNet cash nflow tafter tax), at the end of the promct's te5 Undrscounted not cash flow (after tax) for the now machine

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Assume that it is January 1, 2022. and that the Mendioza Company is considering the replacement of a machine that has been used for the past 3 years in a special project for the company. This project is expected to continue for an additional 5 years (i.e., until the end of 2026). Mendoze will either keep the existing machine for another 5 years (8 years total) or replace the existing machine now with a new model that has a 5-year estimated life. Pertinent facts regarding this decision ere as follows Purchase price of machine (inc luding transportation, setup charges, etc.) Useful life (detereined at time of acquisition) Estimated salvage value, end of 2026 Expected cash operating costs, per year: Variable (per unit produced/sold) Fixed costs (total) Estimated salvage (terminal) values: Janoary 1, 2022 Decenber 31, 2026 Net working capital connitted at time of acquisition of existing nachine (all fully recovered at end of oroject, Decenber 31, 2026) Incremental net working capital required if new aachine is purchased on January 1, 2022 (all fully recovered at end of project, Decenber 31, 2026) Expected annual volume of output/sales (in units), over the period 2022 to 2026 Keep Existing Machine Purchase New Machine $ 158,000 8 years $ 20, 800 $ 198,000 5 years $ 25,800 $ 0.33 $ 25,800 $ 0.27 $ 24,800 $ 68, B00 $ 11, 200 $ 21, 600 $ 30, 800 $ 10,800 S08,000 soa, 000 *Note: These anmounts are used for depreciation calculations. Assume further that Mendoza is subject to a 40% income tax, for both ordinary income and gains/losses associated with disposal of machinery, end that all cash flows occur at the end of the year, except for the initial investment, Assume that straight-line depreciation is used for tax purposes and that any tax essociated with the disposal of mechinery occurs at the same time as the related transaction. Required: 1 Determine relevent cash flows (efter-tax) at the time of purchase of the new machine (ie, time 0 Januery 1, 2022) 2 Determine the relevant (after-tax) cash inflow each year of project operation (ie, at the end of each of years 1 through 5) 3. Determine the relevant (after-tax) cash inflow at the end of the project's life (i.e., et the project's disposal time. December 31, 2026) 5. Determine the undiscounted net cash flow (after tax) for the new machine and determine whether, on this basis, the old machine should be repleced (For all requirements, do not round intermediate colculations. round your answers to the nearest whole dollar amount.) Net cash fow (after tax), time 0 (e at purchase point) 2 Net cash intiow tatter tax), durng the propect operation Net cash nflow tafter tax), at the end of the procts e 5 Undricounted not cash flow (after tax) for the now machne

Assume that it is January 1, 2022. and that the Mendioza Company is considering the replacement of a machine that has been used for the past 3 years in a special project for the company. This project is expected to continue for an additional 5 years (i.e., until the end of 2026). Mendoze will either keep the existing machine for another 5 years (8 years total) or replace the existing machine now with a new model that has a 5-year estimated life. Pertinent facts regarding this decision ere as follows Purchase price of machine (inc luding transportation, setup charges, etc.) Useful life (detereined at time of acquisition) Estimated salvage value, end of 2026 Expected cash operating costs, per year: Variable (per unit produced/sold) Fixed costs (total) Estimated salvage (terminal) values: Janoary 1, 2022 Decenber 31, 2026 Net working capital connitted at time of acquisition of existing nachine (all fully recovered at end of oroject, Decenber 31, 2026) Incremental net working capital required if new aachine is purchased on January 1, 2022 (all fully recovered at end of project, Decenber 31, 2026) Expected annual volume of output/sales (in units), over the period 2022 to 2026 Keep Existing Machine Purchase New Machine $ 158,000 8 years $ 20, 800 $ 198,000 5 years $ 25,800 $ 0.33 $ 25,800 $ 0.27 $ 24,800 $ 68, B00 $ 11, 200 $ 21, 600 $ 30, 800 $ 10,800 S08,000 soa, 000 *Note: These anmounts are used for depreciation calculations. Assume further that Mendoza is subject to a 40% income tax, for both ordinary income and gains/losses associated with disposal of machinery, end that all cash flows occur at the end of the year, except for the initial investment, Assume that straight-line depreciation is used for tax purposes and that any tax essociated with the disposal of mechinery occurs at the same time as the related transaction. Required: 1 Determine relevent cash flows (efter-tax) at the time of purchase of the new machine (ie, time 0 Januery 1, 2022) 2 Determine the relevant (after-tax) cash inflow each year of project operation (ie, at the end of each of years 1 through 5) 3. Determine the relevant (after-tax) cash inflow at the end of the project's life (i.e., et the project's disposal time. December 31, 2026) 5. Determine the undiscounted net cash flow (after tax) for the new machine and determine whether, on this basis, the old machine should be repleced (For all requirements, do not round intermediate colculations. round your answers to the nearest whole dollar amount.) Net cash fow (after tax), time 0 (e at purchase point) 2 Net cash intiow tatter tax), durng the propect operation Net cash nflow tafter tax), at the end of the procts e 5 Undricounted not cash flow (after tax) for the now machne

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter9: Capital Budgeting And Cash Flow Analysis

Section: Chapter Questions

Problem 10P

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