Net cash flows Central Laundry and Cleaners is considering replacing an existing piece of machinery with a more sophisticated machine. The old machine was purchased 3 years ago at a cost of $54,100, and this amount was being depreciated under MACRS using a 5-year recovery period. The machine has 5 years of usable life remaining. The new machine that is being considered costs $76,500 and requires $4,000 in installation costs. The new machine would be depreciated under MACRS using a 5-year recovery period. The firm can currently sell the old machine for $54,000 without incurring any removal or cleanup costs. The firm is subject to a tax rate of 21%. The revenues and expenses (excluding depreciation and interest) associated with the new and the old machines for the next 5 years aregiven in the table contains the applicable MACRS depreciation percentages.) Note: The new machine will have no terminal value at the end of 5 years. a. Calculate the initial cash flow associated with the replacement of the old machine by the new one.b. Determine the periodic cash flows associated with the proposed replacement. (Note: Be sure to consider the depreciation in year 6.)c. Depict on a timeline the net cash flows found in parts (a) and (b) associated with the proposed replacement decision. Rounded Depreciation Percentages by Recovery Year Using MACRS for First Four Property Classes Percentage by recovery year* Recovery year 3 years 5 years 7 years 10 years133%20%14%10%245%32%25%18%315%19%18%14%47%12%12%12%5 12%9%9%6 5%9%8%7 9%7%8 4%6%9 6%10 6%11 4%Totals100%100%100%100% New machine Old machine YearRevenueExpenses (excluding depreciation and interest) RevenueExpenses (excluding depreciation and interest)1$749,800 $720,100 $67,4700$66,02002749800720100 6767006602003749800720100 6807006602004749800720100 6787006602005749800720100 674700660200 Net cash flows Central Laundry and Cleaners is considering replacing an existing piece of machinery with a more sophisticated machine. The old machine waspurchased 3 years ago at a cost of $54,100, and this amount was being depreciated under MACRS using a 5-year recovery period. The machine has 5 years ofusable life remaining. The new machine that is being considered costs $76,500 and requires $4,000 in installation costs. The new machine would be depreciatedunder MACRS using a 5-year recovery period. The firm can currently sell the old machine for $54,000 without incurring any removal or cleanup costs. The firm issubject to a tax rate of 21%. The revenues and expenses (excluding depreciation and interest) associated with the new and the old machines for the next 5 yearsaregiven in the table. (Tablecontains the applicable MACRS depreciation percentages.) Note: The new machine will have no terminal value at the end of5 years.a. Calculate the initial cash flow associated with replacement of the old machine by the new one.b. Determine the periodic cash flows associated with the proposed replacement. (Note: Be sure to consider the depreciation in year 6.)c. Depict on a time line the net cash flows found in parts (a) and (b) associated with the proposed replacement decision. a. Calculate the initial cash flow associated with replacement of the old machine by the new oneCalculate the initial cash flow below: (Round to the nearest dollar.)Cost of new assetInstallation costsTotal cost of new assetProceeds from sale of old assetTax on sale of old assetTotal proceeds, sale of old assetInitial cash flow$Year$YearProfit before depreciation and taxesDepreciationNet profit before taxesTaxesNet profit after taxesOperating cash inflows(Round to the nearest dollar.)Profit before depreciation and taxesDepreciationNet profit before taxesTaxesNet profit after taxesOperating cash inflows(Round to the nearest dollar.)$$$$$$$$696969$$$$$$12YearProfit before depreciation and taxesDepreciationNet profit before taxesTaxesNet profit after taxesOperating cash inflowsRound to the nearest dollar.)YearProfit before depreciation and taxesDepreciationNet profit before taxesTaxesNet profit after taxesOperating cash inflowsRound to the nearest dollar)YearProfit before depreciation and taxesDepreciationNet profit before taxesTaxesNet profit after taxesOperating cash inflowsIncremental cash flows(Round to the nearest dollar.)YearProfit before depreciation and taxesDepreciationNet profit before taxesTaxesNet profit after taxesOperating cash inflowsIncremental cash flows$$$$$$$$$$$$69 69 69 LA$$$$$$$$3456 Calculation the cash flows with the new machine and the net incremental castYearProfit before depreciation and taxesDepreciationNet profit before taxesTaxesNet profit after taxesOperating cash inflowsIncremental cash flows(Round to the nearest dollar.)YearProfit before depreciation and taxesDepreciationNet profit before taxesTaxesNet profit after taxesOperating cash inflowsIncremental cash flows(Round to the nearest dollar.)$$$$S$$$$$$S12YearProfit before depreciation and taxesDepreciationNet profit before taxesTaxesNet profit after taxesOperating cash inflowsIncremental cash flowsRound to the nearest dollar.)YearProfit before depreciation and taxesDepreciationNet profit before taxesTaxesNet profit after taxesOperating cash inflowsIncremental cash flowsRound to the nearest dollar.)YearProfit before depreciation and taxesDepreciationNet profit before taxesTaxesNet profit after taxesOperating cash inflowsE(Round to the nearest dollar.)YearProfit before depreciation and taxesDepreciationNet profit before taxesTaxesNet profit after taxesOperating cash inflows---____6969$$$$6969$$69 69 69 69 69 69 67$$34$$$GALA$$$$$$$$$56

For replacement project, all incremental values are considered during analysis.Based on the provided information, the book value of old machine today and incremental depreciation are calculated as shown below. Formulas used in the above table are shown below. Total initial cost of new machine reduces by after tax salvage value of old machine. After tax salvage value of old machine is calculated as shown below. After tax salvage value of old machine=Market value-Tax rate×Market value-book value=$54,000-0.21×$54,000-15,689=$45,954.69 Initial cost is $34,545.31 (=$80,500-$45,954.69). (b) Periodic cash flows are calculated using the incremental values as shown below. Here, incremental EBITDA is calculated as shown below. Incremental EBITDA=Revenue-expensesnew machine-Revenue-expensesold machine Formulas used in the above table are shown below. c. It is shown in the above table.

Answered: Net cash flows Central Laundry and…

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

Section: Chapter Questions

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Net cash flows Central Laundry and Cleaners is considering replacing an existing piece of machinery with a more sophisticated machine. The old machine was purchased 3 years ago at a cost of $54,100, and this amount was being depreciated under MACRS using a 5-year recovery period. The machine has 5 years of usable life remaining. The new machine that is being considered costs $76,500 and requires $4,000 in installation costs. The new machine would be depreciated under MACRS using a 5-year recovery period. The firm can currently sell the old machine for $54,000 without incurring any removal or cleanup costs. The firm is subject to a tax rate of 21%. The revenues and expenses (excluding depreciation and interest) associated with the new and the old machines for the next 5 years are

given in the table contains the applicable MACRS depreciation percentages.) Note: The new machine will have no terminal value at the end of 5 years.

a. Calculate the initial cash flow associated with the replacement of the old machine by the new one.

b. Determine the periodic cash flows associated with the proposed replacement. (Note: Be sure to consider the depreciation in year 6.)

c. Depict on a timeline the net cash flows found in parts (a) and (b) associated with the proposed replacement decision.

Rounded Depreciation Percentages by Recovery Year Using MACRS for First Four Property Classes
	Percentage by recovery year*
Recovery year	3 years	5 years	7 years	10 years
1	33%	20%	14%	10%
2	45%	32%	25%	18%
3	15%	19%	18%	14%
4	7%	12%	12%	12%
5		12%	9%	9%
6		5%	9%	8%
7			9%	7%
8			4%	6%
9				6%
10				6%
11				4%
Totals	100%	100%	100%	100%

	New machine		Old machine
Year	Revenue	Expenses (excluding depreciation and interest)	Revenue	Expenses (excluding depreciation and interest)
1	$749,800	$720,100	$67,4700	$66,0200
2	749800	720100	676700	660200
3	749800	720100	680700	660200
4	749800	720100	678700	660200
5	749800	720100	674700	660200

Net cash flows Central Laundry and Cleaners is considering replacing an existing piece of machinery with a more sophisticated machine. The old machine was
purchased 3 years ago at a cost of $54,100, and this amount was being depreciated under MACRS using a 5-year recovery period. The machine has 5 years of
usable life remaining. The new machine that is being considered costs $76,500 and requires $4,000 in installation costs. The new machine would be depreciated
under MACRS using a 5-year recovery period. The firm can currently sell the old machine for $54,000 without incurring any removal or cleanup costs. The firm is
subject to a tax rate of 21%. The revenues and expenses (excluding depreciation and interest) associated with the new and the old machines for the next 5 years
are
given in the table. (Table
contains the applicable MACRS depreciation percentages.) Note: The new machine will have no terminal value at the end of
5 years.
a. Calculate the initial cash flow associated with replacement of the old machine by the new one.
b. Determine the periodic cash flows associated with the proposed replacement. (Note: Be sure to consider the depreciation in year 6.)
c. Depict on a time line the net cash flows found in parts (a) and (b) associated with the proposed replacement decision.

a. Calculate the initial cash flow associated with replacement of the old machine by the new one
Calculate the initial cash flow below: (Round to the nearest dollar.)
Cost of new asset
Installation costs
Total cost of new asset
Proceeds from sale of old asset
Tax on sale of old asset
Total proceeds, sale of old asset
Initial cash flow
$
Year
$
Year
Profit before depreciation and taxes
Depreciation
Net profit before taxes
Taxes
Net profit after taxes
Operating cash inflows
(Round to the nearest dollar.)
Profit before depreciation and taxes
Depreciation
Net profit before taxes
Taxes
Net profit after taxes
Operating cash inflows
(Round to the nearest dollar.)
$
$
$
$
$
$
$
$
696969
$
$
$
$
$
$
1
2
Year
Profit before depreciation and taxes
Depreciation
Net profit before taxes
Taxes
Net profit after taxes
Operating cash inflows
Round to the nearest dollar.)
Year
Profit before depreciation and taxes
Depreciation
Net profit before taxes
Taxes
Net profit after taxes
Operating cash inflows
Round to the nearest dollar)
Year
Profit before depreciation and taxes
Depreciation
Net profit before taxes
Taxes
Net profit after taxes
Operating cash inflows
Incremental cash flows
(Round to the nearest dollar.)
Year
Profit before depreciation and taxes
Depreciation
Net profit before taxes
Taxes
Net profit after taxes
Operating cash inflows
Incremental cash flows
$
$
$
$
$
$
$
$
$
$
$
$
69 69 69 LA
$
$
$
$
$
$
$
$
3
4
5
6

Calculation the cash flows with the new machine and the net incremental cast
Year
Profit before depreciation and taxes
Depreciation
Net profit before taxes
Taxes
Net profit after taxes
Operating cash inflows
Incremental cash flows
(Round to the nearest dollar.)
Year
Profit before depreciation and taxes
Depreciation
Net profit before taxes
Taxes
Net profit after taxes
Operating cash inflows
Incremental cash flows
(Round to the nearest dollar.)
$
$
$
$
S
$
$
$
$
$
$
S
1
2
Year
Profit before depreciation and taxes
Depreciation
Net profit before taxes
Taxes
Net profit after taxes
Operating cash inflows
Incremental cash flows
Round to the nearest dollar.)
Year
Profit before depreciation and taxes
Depreciation
Net profit before taxes
Taxes
Net profit after taxes
Operating cash inflows
Incremental cash flows
Round to the nearest dollar.)
Year
Profit before depreciation and taxes
Depreciation
Net profit before taxes
Taxes
Net profit after taxes
Operating cash inflows
E
(Round to the nearest dollar.)
Year
Profit before depreciation and taxes
Depreciation
Net profit before taxes
Taxes
Net profit after taxes
Operating cash inflows
---____
6969
$
$
$
$
6969
$
$
69 69 69 69 69 69 67
$
$
3
4
$
$
$
GALA
$
$
$
$
$
$
$
$
$
5
6

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