Principles of Managerial Finance (14th Edition) (Pearson Series in Finance)

14th Edition

ISBN: 9780133507690

Author: Lawrence J. Gitman, Chad J. Zutter

Publisher: PEARSON

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Textbook Question

Chapter 11, Problem 11.24P

Net cash flows: No terminal value 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 $50,000, 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 being considered costs $76,000 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 $55,000 without incurring any removal or cleanup costs. The firm is subject to a tax rate of 40%. 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 below. (See Table 4.2 for the applicable depreciation percentages.)

Chapter 11, Problem 11.24P, Net cash flows: No terminal value Central Laundry and Cleaners is considering replacing an existing

a. Calculate the initial investment associated with replacement of the old machine by the new one.
b. Determine the operating cash flows associated with the proposed replacement. (Note: Be sure to consider the deprecation in year 6.)
c. Depict on a timeline the net cash flows found in parts a and b associated with the proposed replacement decision.

Definition Definition Tax imposed by the government on the "gain" or increase in the value of an asset at the time of its sale by the owner. Capital gain is computed based on the purchase price and sale price of the asset. If the sale price of the asset is more than the purchase price, there is a gain on the sale of asset. A tax is imposed on such gain in accordance with the applicable tax rates at the time of sale.

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Chapter 11, Problem 11.23P

Chapter 11, Problem 11.25P

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Chapter 11 Solutions

Principles of Managerial Finance (14th Edition) (Pearson Series in Finance)

Ch. 11.1 - Prob. 1FOE Ch. 11.1 - Prob. 11.1RQ Ch. 11.1 - What three types of net cash flows may exist for a...Ch. 11.1 - Prob. 11.3RQ Ch. 11.1 - Prob. 11.4RQ Ch. 11.1 - Prob. 1GF Ch. 11.2 - Explain how to use each of the following inputs to...Ch. 11.2 - Prob. 11.6RQ Ch. 11.2 - Prob. 11.7RQ Ch. 11.2 - Prob. 11.8RQ

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