A company is considering replacing one of the old machines usedin the manufacturing process. The machine was purchased 2 years agofor $600,000. This machine is being depreciated on a straight-linebasis, and it has 4 years of remaining life. When this machine waspurchased 2 years ago, it was assumed to have zero salvage value atthe end of its useful life of 6 years. Currently, this machine hasa market value of $250,000. The company intends to keep this oldmachine as spare if the replacement happens. The current revenuegenerated by this machine is $250,000 annually and the cost ofoperating the machine is $175,000 annually.
The replacement machine will cost of $750,000 and $50,000 forshipping and transportation to the company’s location. The newmachine falls into 3-year MACRS (33%, 45%, 15% and 7%). Thereplacement machine would permit an output expansion, so sales willbecome $450,000 per year. Even so, the new machine's greaterefficiency would cause operating expenses to become $95,000 peryear. The new machine would require inventories be increased by$65,000, but accounts payable would simultaneously increase by$10,000. The replacement project life is 4 years. The new machinecan be sold at the end of the project’s life for $50,000 while theold machine will not have any value at the end of the4th year. The company’s marginal federal-plus-state taxrate is 40%, and its cost of capital is 12%.
What is cash flow CF1 to be used in NPV calculations?
| | 287,600 |
| | 233,600 |
| | 228,300 |
| | 246,800 |
| | 212,400 |
