The Taylor Corporation is using a machine that originally cost $88,000. The mach

Question

The Taylor Corporation is using a machine that originally cost $88,000. The machine is being depreciated by the straight-line method over eight years ($11,000 per year) and has four years of depreciation remaining. The machine has a book value of $44,000 and a current market value of $40,000. Jacqueline Elliott, the Chief Financial Officer of Taylor, is considering replacing this machine with a newer model costing $75,000. The new machine will save $5,000 in after-tax earnings each year for the next six years. The new machine is in the 5-year MACRS category. Taylor Corporation is in the 34% tax bracket and has a 10% cost of capital.

a) Calculate the cash inflows from the sale of the old machine.
b) Calculate the net cost of the new machine.
c) Calculate the incremental depreciation on the new versus the old machine.
d) Determine the net present value of the new machine. Should they purchase the new machine?

Explanation / Answer

YEARS

MACRS DEPRECIATION RATE

DEPRECIATION

=75000*DEPRECIATION RATE

AFTER TAX EARNINGS SAVINGS

CASHFLOW = DEPRECIATION + AFTER TAX EARNINGS SAVINGS

0

75000

YEARS

MACRS DEPRECIATION RATE

DEPRECIATION

=75000*DEPRECIATION RATE

AFTER TAX EARNINGS SAVINGS

CASHFLOW = DEPRECIATION + AFTER TAX EARNINGS SAVINGS

0

75000

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