The Everly Equipment Company\'s flange-lipping machine was purchased 5 years ago

Question

The Everly Equipment Company's flange-lipping machine was purchased 5 years ago for $90,000. It had an expected life of 10 years when it was bought and is being depreciated by the straight-line method by $9,000 per year. As the older flange-lippers are robust and useful machines, this one can be sold for $20,000 at the end of its useful life.

A new high-efficiency, digital-controlled flange-lipper can be purchased for $150,000, including installation costs. During its 5-year life, it will reduce cash operating expenses by $50,000 per year, although it will not affect sales. At the end of its useful life, the high-efficiency 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 33.33%, 44.45%, 14.81%, and 7.41%.

The old machine can be sold today for $50,000. The firm's tax rate is 35%, and the appropriate WACC is 14%.

If the new flange-lipper is purchased, what is the amount of the initial cash flow at Year 0? Round your answer to the nearest whole dollar. Enter negative answers with 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 whole dollar.

            CF1   $______

            CF2   $______

            CF3 $______

            CF4   $______

            CF5   $______

What is the NPV of this project? Round your answer to the nearest whole dollar.

Explanation / Answer

a. Initial cash flow at year 0 = Cost of new machine - After-tax salvage value of old machine

= $ ( 150,000 - 50,000 + (5,000 x 35%) ) = $ - 101,750

b. Incremental net cash flows:

c. NPV of the project at 14% discount rate = Present value of cash inflows - Initial investment

Present value of cash inflows = 46,850 x 0.8772 + 52,686.25 x 0.7695 + 37,125.25 x 0.6750 + 33,240.25 x 0.5921 + 32,500 x 0.5194 = $ 41,096.82 + $ 40,542.10 + $ 25,059.54 + $ 19,681.55 + $ 16,880.5 = $ 143,260.51

NPV = $ ( 143,260.51 - 101,750) = $ 41,511

Year 0 1 2 3 4 5 Reduction in cash operating expenses 50,000 50,000 50,000 50,000 50,000 Incremental depreciation 41,000 57,675 13,215 2,115 0 Cash flows -101,750 46,850 52,686.25 37,125.25 33,240.25 32,500

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