the replacement of one of its bottling machines with a newer and d machine has a

Question

the replacement of one of its bottling machines with a newer and d machine has a book value of $400,000 and a remaining useful life of 5 years. The firm The Bedrock Bottling Company is contemplating ' yearn, but it enan sel i now to another does not expect to realize any return from scrapping the old machine in 5 years, firm in the industry for $300,000. The ol d machine is being depreciated by $80,000 per year, using the straight-line method The new machine has a purchase price of $1,000,000, an estimated useful life and MACRS class life of 5 years and an estimated salvage value of $ 180,000. The applicable depreciation rates are 20%, 32%, 19 %, 12%, 11%, and 6%. It is expected to economize on electric power usage, labor, and repair costs, as well as to reduce the number of defective bottles. In total, an annual savings of $250,000 will be realized if the new machine is installed. The company's marginal tax rate is 40% and it has a 12% WACC. What is the initial (year 0) cash flow for Bedrock's proposed replacement project? A. -$660,000 B. -$841,000 12) C. -$700,000 D. -$800,000 E. -$600,000

Explanation / Answer

a) -$660,000

a. 1st step, compute the after-tax salvage value of the old machine if sold now: Salvage value of old machine $ 300,000 Add: Tax savings from loss on sale     Book value $ 400,000     less: Selling price 300,000     Loss on sale $ 100,000     x Marginal tax rate 40% 40,000 After-tax salvage value of old machine $ 340,000 2nd step, compute the initial cash outlay: Purchase price of new machine $ 1,000,000 Less: After-tax salvage value of old machine 340,000 Initial cash outlay $ 660,000

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