The Darlington Equipment Company purchased a machine 5 years ago at a cost of $1

Question

The Darlington Equipment Company purchased a machine 5 years ago at a cost of $100, 000. The machine had an expected life of 10 years at the time of purchase, and it is being depreciated by the straight-line method by $10, 000 per year. If the machine is not replaced, it can be sold for $10, 000 at the end of its useful life. A new machine can be purchased for $170, 000, including installation costs. During its 5-year life, it will reduce cash operating expenses by $60, 000 per year. Sales are not expected to change. At the end of its useful life, the machine is estimated to be worthless. MACRS depreciation will be used, and the machine will be depreciated over its 3-year class life rather than its 5-year economic life; so the applicable depreciation rates are 33%, 45%, 15%, and 7%. The old machine can be sold today for $60, 000. The firm's tax rate is 40%. The appropriate WACC is 9%. If the new machine is purchased, what is the amount of the initial cash flow at Year 0? Round your answer to the nearest dollar. Negative amount should be indicated by a minus sign. What are the incremental net cash flows that will occur at the end of Years 1 through 5? Round your answers to the nearest dollar. What are the incremental net cash flows that will occur at the end of Years 1 through 5? Round your answers to the nearest dollar. What is the NPV of this project? Round your answer to the nearest cent. Negative amount should be indicated by a minus sign.

Explanation / Answer

a. Initial cash flows = Purchase cost of new machine - Scrap value of old machine

= 170000 - 60000

= $110000

b. Incremental net cash flows:

c.

NPV = -110000 + 58440/(1.09)1 + 66600/(1.09)2 + 46200/(1.09)3 + 40760/(1.09)4 + 36000(1.09)5 = $87618.38

Year 1 2 3 4 5 Cash savings net of tax A: 36000 36000 36000 36000 36000    Depreciation 56100 76500 25500 11900 - Tax savings on depreciation B: 22440 30600 10200 4760 - Incremental cash flows A+B: 58440 66600 46200 40760 36000

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.