Replacement Analysis The Everly Equipment Company's flange -lipping machine was purchased 5 years ago for $50,000. It had an expected life of 10 years when it was bought and its remaining depreciation is $5,000 per year for each year of its remaining life. As older flange - lippers are robust and useful machines, this one 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 $140,000, including installation costs. During its 5-year life, it will reduce cash operating expenses by $30,000 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 $35,000. The firm's tax rate is 25%, and the appropriate cost of capital is 14%. a. If the new flange - lipper is purchased, what is the amount of the initial cash flow at Year 0? Answer = $X b. What are the incremental net cash flows that will occur at the end of Years 1 through 5? CF1 = $X CF2 = $X CF3 = $X CF4 = $X CF5 = SX c. What is the NPV of this project?
Replacement Analysis The Everly Equipment Company's flange -lipping machine was purchased 5 years ago for $50,000. It had an expected life of 10 years when it was bought and its remaining depreciation is $5,000 per year for each year of its remaining life. As older flange - lippers are robust and useful machines, this one 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 $140,000, including installation costs. During its 5-year life, it will reduce cash operating expenses by $30,000 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 $35,000. The firm's tax rate is 25%, and the appropriate cost of capital is 14%. a. If the new flange - lipper is purchased, what is the amount of the initial cash flow at Year 0? Answer = $X b. What are the incremental net cash flows that will occur at the end of Years 1 through 5? CF1 = $X CF2 = $X CF3 = $X CF4 = $X CF5 = SX c. What is the NPV of this project?
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
Problem 1PS
Related questions
Question
not use ai please
Transcribed Image Text:Replacement Analysis
The Everly Equipment Company's flange -lipping machine was purchased 5 years ago for $50,000. It had an expected life of 10 years
when it was bought and its remaining depreciation is $5,000 per year for each year of its remaining life. As older flange - lippers are
robust and useful machines, this one 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 $140,000, including installation costs. During its 5-year
life, it will reduce cash operating expenses by $30,000 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 $35,000. The firm's tax rate is 25%, and the appropriate cost of capital is 14%.
a. If the new flange - lipper is purchased, what is the amount of the initial cash flow at Year 0?
Answer = $X
b. What are the incremental net cash flows that will occur at the end of Years 1 through 5?
CF1 = $X
CF2 = $X
CF3 = $X
CF4 = $X
CF5 = SX
c. What is the NPV of this project?
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 2 steps
Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education