Kandy Corporation is considering a replacement investment. The machine currently

Question

Kandy Corporation is considering a replacement investment. The machine currently in use was originally purchased two years ago for $65,000. Tax-allowable depreciation is $13,000 per year for five years. The current market value of this machine is $23,000. The new machine being considered would cost $140,000, and require $4,000 shipping cost and $2,000 installation costs. The economic life of the machine is estimated as three years. Tax-allowable depreciation is $70,000 per year for the first two years. If the new machine is acquired, the investments in accounts receivable is expected to increase by $9,000, the inventory by $13,000, and accounts payable by $15,000. The before-tax net operating cash flow is estimated as $120,000 per year for the next three years with the old machine and, $143,000 per year for the next three years with the new machine. The expected resale value of the old and new machines in three years’ time would be $4,000 and $6,600, respectively. The corporate tax rate is 30%.

Explanation / Answer

Caculation of Net cash outflow for Buying new machine

Cacluclation of Incremental Cash flows from New Machine

= $346920-$266500 =$80420/-

Incremental cash floows is less than the Cash outflow so Buying of New machine is not feasible

Particulars Amount($) Amount($) Cost of the Machine 140000 Shipping 4000 Installation 2000 Increse of Accounts Receivable 9000 Increse of Accounts Receivable 13000 168000 Less Old Machine Vale 23000 Increase of Accounts Payable 15000 38000 Net Cash outflow 130000

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