The Bigbee Bottling Company is contemplating the replacement of one of its bottling machines with a newer and more efficient one. The old machine was purchased prior to the TCJA, has a book value of $650,000, and a remaining useful life of 5 years. The firm does not expect to realize any return from scrapping the old machine in 5 years, but it can sell it now to another firm in the industry for $235,000. The old machine is being depreciated by $130,000 per year, using the straight-line method. The new machine has a purchase price of $1,100,000, an estimated useful life of 5 years, and an estimated salvage value of $150,000. The new machine is eligible for 100% bonus depreciation at the time of purchase. It is expected to economize on electric power usage, labor, and repair costs, as well as to reduce the number of defective bottles. In total, an annual savings before taxes of $250,000 will be realized if the new machine is installed. The company's marginal tax rate is 25%, and it has a 12% WACC. a. What initial cash outlay required for the new machine after bonus depreciation considered? Cash outflow should be indicated by a minus sign. Round your answer to the nearest dollar. $ b. Calculate the change in the annual depreciation expense if the replacement is made. Negative change values, if any, should be indicated by a minus sign. Round your answers to the nearest dollar. Year Change in Depreciation $ $ $ $ c. What are the incremental cash flows in Years 1 through 5? Round your answers to the nearest dollar. Year 1 Year 2 Year 3 Year 4 S Year 5
The Bigbee Bottling Company is contemplating the replacement of one of its bottling machines with a newer and more efficient one. The old machine was purchased prior to the TCJA, has a book value of $650,000, and a remaining useful life of 5 years. The firm does not expect to realize any return from scrapping the old machine in 5 years, but it can sell it now to another firm in the industry for $235,000. The old machine is being depreciated by $130,000 per year, using the straight-line method. The new machine has a purchase price of $1,100,000, an estimated useful life of 5 years, and an estimated salvage value of $150,000. The new machine is eligible for 100% bonus depreciation at the time of purchase. It is expected to economize on electric power usage, labor, and repair costs, as well as to reduce the number of defective bottles. In total, an annual savings before taxes of $250,000 will be realized if the new machine is installed. The company's marginal tax rate is 25%, and it has a 12% WACC. a. What initial cash outlay required for the new machine after bonus depreciation considered? Cash outflow should be indicated by a minus sign. Round your answer to the nearest dollar. $ b. Calculate the change in the annual depreciation expense if the replacement is made. Negative change values, if any, should be indicated by a minus sign. Round your answers to the nearest dollar. Year Change in Depreciation $ $ $ $ c. What are the incremental cash flows in Years 1 through 5? Round your answers to the nearest dollar. Year 1 Year 2 Year 3 Year 4 S Year 5
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
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Transcribed Image Text:The Bigbee Bottling Company is contemplating the replacement of one of its bottling machines with a newer and more efficient one. The old machine was purchased prior to the TCJA, has a book value of
$650,000, and a remaining useful life of 5 years. The firm does not expect to realize any return from scrapping the old machine in 5 years, but it can sell it now to another firm in the industry for $235,000. The
old machine is being depreciated by $130,000 per year, using the straight-line method.
The new machine has a purchase price of $1,100,000, an estimated useful life of 5 years, and an estimated salvage value of $150,000. The new machine is eligible for 100% bonus depreciation at the time of
purchase. It is expected to economize on electric power usage, labor, and repair costs, as well as to reduce the number of defective bottles. In total, an annual savings before taxes of $250,000 will be realized
if the new machine is installed. The company's marginal tax rate is 25%, and it has a 12% WACC.
a. What initial cash outlay is required for the new machine after bonus depreciation is considered? Cash outflow should be indicated by a minus sign. Round your answer to the nearest dollar.
$
b. Calculate the change in the annual depreciation expense if the replacement is made. Negative change values, if any, should be indicated by a minus sign. Round your answers to the nearest dollar.
Year Change in Depreciation
$
$
1
2
$
3
4
5
$
$
$
c. What are the incremental cash flows in Years 1 through 5? Round your answers to the nearest dollar.
Year 1
Year 2
Year 3
Year 4
d. Should the firm purchase the new machine?
-Select-
$
$
$
Year 5
e. In general, how would each of the following factors affect the investment decision, and how should each be treated?
1. The expected life of the existing machine decreases.
The new machine will look -Select-than before due to the relative -Select- of the cash flows attributable to it ✔ -Select-
2. The WACC is not constant, but is increasing as Bigbee adds more projects into its capital budget for the year.
The NPV will -Select- due to a -Select-capital cost.
Some additional estimation
No additional estimation
should be made
...
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