The Darlington Equipment Company purchased a machine 5 years ago, prior to the TCJA, at a cost of $80,000. The machine had an expected life of 10 years at the time of purchase, and it is being depreciated by the straight-line method by $8,000 per year. If the machine is not replaced, it can be sold for $5,000 at the end of its useful life. A new machine can be purchased for $160,000, including installation costs. During its 5-year life, it will reduce cash operating expenses by $40,000 per year. Sales are not expected to change. At the end of its useful life, the machine is estimated to be worthless. The new machine is eligible for 100% bonus depreciation at the time of purchase. The old machine can be sold today for $50,000. The firm's tax rate is 25%. The appropriate WACC is 9%. a. If the new machine is purchased, what is the amount of the initial cash flow at Year 0 after bonus depreciation is considered? Cash outflow should be indicated by a minus sign. Round your answer to the nearest dollar. $ b. What are the incremental cash flows that will occur at the end of Years 1 through 5? Round your answers to the nearest dollar. Year 1 Year 2 Year 3 Year 4 Year 5 $ $ 2$ 2$ $ c. What is the NPV of this project? Do not round intermediate calculations. Round your answer to the nearest cent. Should Darlington replace the old machine? -Select-
The Darlington Equipment Company purchased a machine 5 years ago, prior to the TCJA, at a cost of $80,000. The machine had an expected life of 10 years at the time of purchase, and it is being depreciated by the straight-line method by $8,000 per year. If the machine is not replaced, it can be sold for $5,000 at the end of its useful life. A new machine can be purchased for $160,000, including installation costs. During its 5-year life, it will reduce cash operating expenses by $40,000 per year. Sales are not expected to change. At the end of its useful life, the machine is estimated to be worthless. The new machine is eligible for 100% bonus depreciation at the time of purchase. The old machine can be sold today for $50,000. The firm's tax rate is 25%. The appropriate WACC is 9%. a. If the new machine is purchased, what is the amount of the initial cash flow at Year 0 after bonus depreciation is considered? Cash outflow should be indicated by a minus sign. Round your answer to the nearest dollar. $ b. What are the incremental cash flows that will occur at the end of Years 1 through 5? Round your answers to the nearest dollar. Year 1 Year 2 Year 3 Year 4 Year 5 $ $ 2$ 2$ $ c. What is the NPV of this project? Do not round intermediate calculations. Round your answer to the nearest cent. Should Darlington replace the old machine? -Select-
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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Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
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Transcribed Image Text:The Darlington Equipment Company purchased a machine 5 years ago, prior to the TCJA, at a cost of $80,000. The machine had an expected life of 10 years at
the time of purchase, and it is being depreciated by the straight-line method by $8,000 per year. If the machine is not replaced, it can be sold for $5,000 at the
end of its useful life.
A new machine can be purchased for $160,000, including installation costs. During its 5-year life, it will reduce cash operating expenses by $40,000 per year.
Sales are not expected to change. At the end of its useful life, the machine is estimated to be worthless. The new machine is eligible for 100% bonus
depreciation at the time of purchase.
The old machine can be sold today for $50,000. The firm's tax rate is 25%. The appropriate WACC is 9%.
a. If the new machine is purchased, what is the amount of the initial cash flow at Year 0 after bonus depreciation is considered? Cash outflow should be
indicated by a minus sign. Round your answer to the nearest dollar.
$
b. What are the incremental cash flows that will occur at the end of Years 1 through 5? Round your answers to the nearest dollar.
Year 1
Year 2
Year 3
Year 4
Year 5
$
$
c. What is the NPV of this project? Do not round intermediate calculations. Round your answer to the nearest cent.
Should Darlington replace the old machine?
-Select-
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