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.)

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