please answer all parts of the question I need part a and b answered please, if
ID: 2794149 • Letter: P
Question
please answer all parts of the question
I need part a and b answered please, if you cannot answer both please answer part b. Please show calculations
ine is being considered as a replacement for a current machine. The current achine was purchased 12 years ago for $45,000, with an estimated life of 20 years with no salvage. Current market value is thought to be $40,000. Last year, this machine produced revenues of $25,425 while incurring cash operating expenses of $7,429. Inflation has been averaging 7% per year and revenues have been fully responsive while maintenance costs have been increasing 23% per year. Market value of the machine is expected to decline by 14% per year. The new machine will cost $53,500. Life and salvage are unknown. Revenues will be the same as the current machine, and cash operating costs will be $5,000 the first year and increase by 11% per year For the old machine, DDB switching to SYD after 2 years has been used. 7 Year MACRS will be used for the new machine. The tax rate is 50% on ordinary income, and 25% on capital gains. Use IRR techniques to find how long the current machine should be kept a. b. Calculate the rate of return for the new machine, and on the incremental (B-A) investment. Assume the new machine will last for the length of time calculated in part a, and that salvage for the current machine at that time will be equal to its market value.Explanation / Answer
Cost of current machine 45000 Life of machine 20 years Balance lif od machine 8 years Depreacition of current machine 2250 lat year revenue 25425 Cash operating expenses 7429 Inflation In revenue 7% Inflation in maintenance cost 23% New mahcine cost 53500 Life and salvage value unknown Revenue with new machine same as old machine Operating cost 5000 Inflation of operating cost 11% Income tax rate 50% Capital gain tax 25% Dear Friend I will answer part b Lets calculate the incremental revenue for all the 8 years STEP 1 INTIAL CASH OUTFLOW SALE OF OLD MACHINE: BOOK VALUE = 45000 -2250*12 18000 SALE PRICE 40000 CAPITAL GAIN 22000 CAPITAL GAIN TAX @25% 5500 NET CASH INFLOW 16500 COST OF NEW MACHINE 53500 NET CASH OUTLOW 37000 STEP2 COMPUTATION OF CASH INFLOWS PARTICULARS 1 2 3 4 5 6 7 8 SALES OLD MACHINE 25425 27204.75 29109.08 31146.72 33326.99 35659.88 38156.07 40826.99 SALES OF NEW MACHINE 25425 25425 25425 25425 25425 25425 25425 25425 OPERATING COST OLD MACHINE 7429 9137.67 11239.33 13824.38 17003.99 20914.91 25725.33 31642.16 OPERATING COST NEW MACHINE 5000 5550 6160.5 6838.155 7590.352 8425.291 9352.073 10380.8 DEPRECIATION IN OLD MACHINE 2250 2250 2250 2250 2250 2250 2250 2250 DEPRECIATION IN NEW MACHINE 6687.5 6687.5 6687.5 6687.5 6687.5 6687.5 6687.5 6687.5 INCREASE IN SALES 0 0 0 0 0 0 0 0 DECREASE IN COST 2429 3587.67 5078.834 6986.226 9413.637 12489.62 16373.26 21261.36 NET INCREASE IN PROFIT 2429 3587.67 5078.834 6986.226 9413.637 12489.62 16373.26 21261.36 LESS: INCREASE IN DEP 4437.5 4437.5 4437.5 4437.5 4437.5 4437.5 4437.5 4437.5 INCREASE IN PBT -2008.5 -849.83 641.3341 2548.726 4976.137 8052.115 11935.76 16823.86 TAX @ 50% -1004.25 -424.915 320.667 1274.363 2488.068 4026.058 5967.881 8411.93 INCREASE IN PAT -1004.25 -424.915 320.667 1274.363 2488.068 4026.058 5967.881 8411.93 ADD: INCREASE IN DEP 3433.25 4012.585 4758.167 5711.863 6925.568 8463.558 10405.38 12849.43 STEP3: COMPUTATION OF RATE OF RETURN IN IRR FORMAT YEAR AMOUNT OPTION1 PVF@10% OPTION1 PVF@15% PVF AMOUNT PVF AMOUNT 0 -37000 0.909091 -33636.4 0.869565 -32173.9 1 3433.25 0.826446 2837.397 0.756144 2596.03 2 4012.585 0.751315 3014.715 0.657516 2638.34 3 4758.167 0.683013 3249.892 0.571753 2720.497 4 5711.863 0.620921 3546.618 0.497177 2839.805 5 6925.568 0.564474 3909.303 0.432328 2994.114 6 8463.558 0.513158 4343.143 0.375937 3181.765 7 10405.38 0.466507 4854.187 0.326902 3401.537 8 12849.43 0.424098 5449.413 0.284262 3652.61 NPV -2431.7 -8149.21 IRR=OPTION 1 RATE + (NPV1)/NPV1-NPV2 * (RATE AT OPTION2- RATE AT OPTION1) .= 10+ (-2431.7)/ (-2431.7-8149.21)*5 .=8.72% THEREFORE IRR = 8.72% (APPROX)
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