You recently began working for Orange Fizz Company. Company management is contem

Question

You recently began working for Orange Fizz Company. Company management is contemplating the replacement of its three-year old bottling machines that originally cost $ 1, 200.000 with newer and more efficient ones. The old machines were placed on the MACRS five-year class life depreciation schedule three years ago. Total operating costs for the old bottling machines are $550,000 per year and Orange Fizz will bottle 12 million bottles per year each year for the next seven years. The firm expects to realize a $50,000 return from salvaging the old machines in 7 years, but they may be sold now to another firm in the industry for $200,000. It retained, the old machines would be operational for the next 7-years. The new machines, if purchased, would cost $1,300,000 and would be placed on a MACRS five-year class life depreciation but will be kept in operation for the next 7 years. The machines would have an estimated salvage value of $185,000 in seven years. Total annual savings in operating costs of $285,000 will be realized if the machines are installed. The company is in the 40% tax bracket, and it has a 10% cost of capital. Should the replacement be made? Use a relative (incremental) cash flow analysis similar to what we did in class and in your text and determine the NPV and IRR for the project.

Explanation / Answer

Calculation of NPV & IRR of the Project Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Total Particulars Amount (in $) Annual Savings in Operating costs 285000.00 285000.00 285000.00 285000.00 285000.00 285000.00 285000.00 1995000.00 Depreciation on Old machine 138240.00 138240.00 69120.00 0.00 0.00 0.00 0.00 345600.00 Depreciation on New machine 260000.00 416000.00 249600.00 149760.00 149760.00 74880.00 0.00 1300000.00 Additional Dep. On New machine 121760.00 277760.00 180480.00 149760.00 149760.00 74880.00 0.00 954400.00 Additional Salvage Value 0.00 0.00 0.00 0.00 0.00 0.00 135000.00 135000.00 Savings after Depreciation 163240.00 7240.00 104520.00 135240.00 135240.00 210120.00 285000.00 1040600.00 Less: Tax @ 40% 65296.00 2896.00 41808.00 54096.00 54096.00 84048.00 114000.00 416240.00 Savings after Tax 97944.00 4344.00 62712.00 81144.00 81144.00 126072.00 171000.00 624360.00 Savings after adding back depreciation 219704.00 282104.00 243192.00 230904.00 230904.00 200952.00 171000.00 1578760.00 Present Value factor 0.9091 0.8264 0.7513 0.6830 0.6209 0.5645 0.5132 Present Value 199730.91 233143.80 182713.75 157710.54 143373.22 113432.17 87750.04 1117854.42 Additional Cost to install machine 1100000.00 NPV 17854.42 IRR 0.47%

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

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