Felder\'s manufacturing is considering the purchase of new equipment that cost 7

Question

Felder's manufacturing is considering the purchase of new equipment that cost 750,000 to replace equipment that is old and inefficient. Felder has found a buyer for the old equipment who will pay 8,000 for it. The new equipment is expected to produce 12,000 of additional revenue each year, but will result in additional maintenance cost of 2,000. The new equipment will have a salvage of 10,000 and will be depreciated over 10 years.

Required: Identify the amount and timing of cash flows relevant to felder's decision to purchase the new equipment.

Explanation / Answer

Timing Details Amount Total Year 0 Initial Purchase price -7,50,000.00 -7,50,000.00 Year 0 Salvage value of old machine          8,000.00          8,000.00 Year 1-10 Incremantal revenue        12,000.00    1,20,000.00 Year 1-10 Incremental Cost          2,000.00        20,000.00 Year 10 Residual Value        10,000.00        10,000.00 -7,18,000.00 -5,92,000.00

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