3. Blue Ocean Tech currently operates with a unit it purchased four years ago. The unit...

80.2K

Verified Solution

Question

Finance

3. Blue Ocean Tech currently operates with a unit it purchasedfour years ago. The unit which originally cost $530,000 currentlyhas a book value of $90,100. (There are 2 years of depreciationremaining using the MACRS rates below). Blue Ocean is consideringreplacing the machine with a newer more efficient one. The new unitwill cost $650,000 and will require an additional $35,000 fordelivery and installation. The firms expects to be able to reducenet operating working capital by $22,000 when the machine isinstalled, but required working capital will be returned to theoriginal level when the machine is sold after 5 years (and no otherchanges are expected each year). Blue Ocean expects to be able tosell the existing unit now for $230,000 and their marginal tax rateis 40%. The new unit will be depreciated using the MACRS 5 yearinvestment class (20%, 32%, 19%, 12%, 11%, and 6% for years 1through 6 respectively).
If Blue Ocean purchases the new unit, annual revenues are notexpected to change, however, annual operating costs (exclusive ofdepreciation) are expected to decrease by $24,000. Theannual revenue and costs are expected to remain at these levels for5 years. After 5 years, the new unit is expected to be sold for$140,000 and if kept, the existing unit will have a book value ofzero and could be sold for $40,000.
A) (8 points) Calculate the year 0 cash flow
B) (9 points) Calculate the terminal value in year 5 and includethe return of NOWC to original levels.
C) (8 points) Calculate the year 1 operating cash flow

Answer & Explanation Solved by verified expert

4.2 Ratings (657 Votes)

A Cost of the new machine including costs for delivery and installation 65000035000 685000 Sale value of the old machinery at t0 230000 Less Book value 90100 Gain if sold at t0 139900 Tax at 40 on gain 55960 After tax sale value of old machine 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

3. Blue Ocean Tech currently operates with a unit it purchasedfour years ago. The unit which originally cost $530,000 currentlyhas a book value of $90,100. (There are 2 years of depreciationremaining using the MACRS rates below). Blue Ocean is consideringreplacing the machine with a newer more efficient one. The new unitwill cost $650,000 and will require an additional $35,000 fordelivery and installation. The firms expects to be able to reducenet operating working capital by $22,000 when the machine isinstalled, but required working capital will be returned to theoriginal level when the machine is sold after 5 years (and no otherchanges are expected each year). Blue Ocean expects to be able tosell the existing unit now for $230,000 and their marginal tax rateis 40%. The new unit will be depreciated using the MACRS 5 yearinvestment class (20%, 32%, 19%, 12%, 11%, and 6% for years 1through 6 respectively). If Blue Ocean purchases the new unit, annual revenues are notexpected to change, however, annual operating costs (exclusive ofdepreciation) are expected to decrease by $24,000. Theannual revenue and costs are expected to remain at these levels for5 years. After 5 years, the new unit is expected to be sold for$140,000 and if kept, the existing unit will have a book value ofzero and could be sold for $40,000.A) (8 points) Calculate the year 0 cash flowB) (9 points) Calculate the terminal value in year 5 and includethe return of NOWC to original levels.C) (8 points) Calculate the year 1 operating cash flow