2. (13 pts.) A factory is considering replacing its existing coining press with a newer, more...

50.1K

Verified Solution

Question

Finance

2. (13 pts.) A factory is considering replacing its existingcoining press with a newer, more efficient one. The existing presswas purchased 4 years ago for $450,000 and is being depreciatedaccording to a 7-year MACRS depreciation schedule. (See page 4 forthe MACRS schedules.) The factory’s CFO estimates that the existingpress has 5 years of useful life remaining. The new press’spurchase price is $560,000. Installation of the new press wouldcost an additional $40,000; this installation cost would be addedto the depreciable base (i.e., it would be capitalized) and thendepreciated across time. The new press (if purchased) would bedepreciated using the 7-year MACRS schedule although thefactory
Assignment 3, p.2
(2, continued) will retire or sell the new press after 5 years.Interest expenses associated with the purchase of the new press areestimated to be roughly $8000 per year for the next 5 years. If thenew press is purchased, revenues will remain the same as they’d beif the old press were maintained. However, the appeal of the newpress is that it will reduce production costs by $153,000/year forthe next 5 years. Also, if the new press is purchased, the oldpress can be sold for $60,000 today. The CFO believes that the newpress would be sold for $90000 in 5 years; the old press’s value att=5 will be $0. NWC would not be affected. The company’s marginaltax rate = 34.0%. The cost of capital (i.e., the required rate ofreturn) for this project is 7.5% (although this variable is notneeded in this problem, given the instructions below)
Calculate the incremental cash flows for this replacementdecision, for time 0, for each year of operation, and attermination. Please make sure that you show clear work as todetermine how you arrived at your incremental cash flows! [Hint:The old press’s net book val. at t=0 is $140,580. Hint: I want toremove any doubts surrounding the depreciation schedule for the oldmachine. Yes, if kept in place, the existing machine will reach abook value of $0 before the machine is retired. Many long-termassets are still functional after they’re fully depreciated.][Note: Normally, you would then use these cash flows to calculateNPV and IRR of the incremental decision to either (1) buy the newpress and sell the old one or (2) keep the old press. Next, youwould make a conclusion about whether or not the existing coiningpress should be replaced at this time. However, this assignmentalready contains an adequate number of other NPV and IRRcalculations.]

Answer & Explanation Solved by verified expert

4.1 Ratings (684 Votes)

Year 0 1 2 3 4 5 6 7 8 Purchase price of new mc 560000 Installation expenses 40000 AT cash flow on sale of Old mc 87397 AT cash flow on sale of new mc 104912 Incremental tax cash outflow savings due to interest exp800034 2720 2720 2720 2720 2720 Inclaftertax savings See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

2. (13 pts.) A factory is considering replacing its existingcoining press with a newer, more efficient one. The existing presswas purchased 4 years ago for $450,000 and is being depreciatedaccording to a 7-year MACRS depreciation schedule. (See page 4 forthe MACRS schedules.) The factory’s CFO estimates that the existingpress has 5 years of useful life remaining. The new press’spurchase price is $560,000. Installation of the new press wouldcost an additional $40,000; this installation cost would be addedto the depreciable base (i.e., it would be capitalized) and thendepreciated across time. The new press (if purchased) would bedepreciated using the 7-year MACRS schedule although thefactoryAssignment 3, p.2(2, continued) will retire or sell the new press after 5 years.Interest expenses associated with the purchase of the new press areestimated to be roughly $8000 per year for the next 5 years. If thenew press is purchased, revenues will remain the same as they’d beif the old press were maintained. However, the appeal of the newpress is that it will reduce production costs by $153,000/year forthe next 5 years. Also, if the new press is purchased, the oldpress can be sold for $60,000 today. The CFO believes that the newpress would be sold for $90000 in 5 years; the old press’s value att=5 will be $0. NWC would not be affected. The company’s marginaltax rate = 34.0%. The cost of capital (i.e., the required rate ofreturn) for this project is 7.5% (although this variable is notneeded in this problem, given the instructions below)Calculate the incremental cash flows for this replacementdecision, for time 0, for each year of operation, and attermination. Please make sure that you show clear work as todetermine how you arrived at your incremental cash flows! [Hint:The old press’s net book val. at t=0 is $140,580. Hint: I want toremove any doubts surrounding the depreciation schedule for the oldmachine. Yes, if kept in place, the existing machine will reach abook value of $0 before the machine is retired. Many long-termassets are still functional after they’re fully depreciated.][Note: Normally, you would then use these cash flows to calculateNPV and IRR of the incremental decision to either (1) buy the newpress and sell the old one or (2) keep the old press. Next, youwould make a conclusion about whether or not the existing coiningpress should be replaced at this time. However, this assignmentalready contains an adequate number of other NPV and IRRcalculations.]