The Dauten Toy Corporation uses an injection molding machine that was purchased 2 years ago. This machine is being depreciated on a straight-line basis, and it has 6 years of remaining life. Its current book value is $2,100, and it can be sold for $2,500 at this time. (Tip: if the firm decides to replace old machine with new one the old will be sold for $ 400 above book value and this $400 will be taxed when calculating cash out flow) Thus, the annual depreciation expense is $2,100/6 = $350 per year. If the old machine is not replaced, it can be sold for $500 at the end of its useful life. Dauten is offered a replacement machine that has a cost of $8,000, an estimated useful life of 6 years, and an estimated salvage value of $800. This machine falls into the MACRS 5-year class; so the applicable depreciation rates are 20%, 32%, 19.2%, 11.52%, 11.52% and 5.76 %. The replacement machine would permit an output expansion, so net revenue would rise by $3,500 per year. Dauten’s marginal federal-plus-state tax rate is 40%. Required: If Dauten decides to go for replacement then: Calculate the initial cash out flow at Year 0 What are the project’s annual net incremental cash flows during Years 1 through 5? Find out the terminal cash flow of the new machine at year six.
The Dauten Toy Corporation uses an injection molding machine that was purchased 2 years ago. This machine is being
Dauten is offered a replacement machine that has a cost of $8,000, an estimated useful life of 6 years, and an estimated salvage value of $800. This machine falls into the MACRS 5-year class; so the applicable depreciation rates are 20%, 32%, 19.2%, 11.52%, 11.52% and 5.76 %. The replacement machine would permit an output expansion, so net revenue would rise by $3,500 per year. Dauten’s marginal federal-plus-state tax rate is 40%.
Required: If Dauten decides to go for replacement then:
- Calculate the initial cash out flow at Year 0
- What are the project’s annual net incremental cash flows during Years 1 through 5?
- Find out the terminal cash flow of the new machine at year six.
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