Use the following information to answer the questions.Please show the work steps

Question

Use the following information to answer the questions.Please show the work steps.

Old machine

Original purchase price $555000

Original life 10 years

Remaining life 5 years

Straight line depreciation in use

Salvage value $50000

Current fair market value $260000

New Machine A

Purchase price $895000

Estimated life 5 years

Straight line Depreciation

Astimated salvage vlue $10000

Estimated Net operating Cash flow increase/decrease (Prior to depreciation and taxes)

End of year 1 $100000

End of yera 2 $150000

End of year 3 $250000

End of year 4 $200000

End of year 5 $200000

Assumption

Tax rate 40%

WACC rate 7%

What is the NVP if you keep the old machine?

What is the NVP if you sell the old machine and buy new machine A?

What decision do you suggest?

a. Keep the old machine and do not buy the new mahine

b. Sell the old machine and buy the new machine

The cash flow creating the least amount of risk or the cash cash flow we should be cartain of is:

a. The cost of the new machine

b. The project cash flow saving in year 4

c. The tax benefit from the depreciation

d. The salvage value on the new machine

Explanation / Answer

NPV of selling old and buying new = 112659-118743 = 5815

Since NPV of selling old machine and buying new is negative, the decision should be to keep old machine and donot buy new machine

The cash flow creating the least amount of risk or the cash cash flow we should be cartain of is: The tax benefir from depreciation

Keep the Old Machine Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Depreciation for remaining years ((555000-50000)/10)*0.4      20,200         20,200         20,200         20,200         20,200 Salvage Value         50,000 Net Cashflows (A)                   -        20,200         20,200         20,200         20,200         70,200 WACC Rate 7% (B) 1           0.93              0.87              0.82              0.76              0.71 (1/1.07) (0.93/1.07) (0.87/1.07) (0.82/1.07) (0.76/1.07) PV of Cashflows (C=A*B)                   -        18,879         17,643         16,489         15,410         50,052 NPV (sum of C)       118,473

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