Macon Company is considering a new assembly line to replace the existing assembly line. The existing...

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Macon Company is considering a new assembly line to replace theexisting assembly line. The existing assembly line was installed 2years ago at a cost of $90,000; it was being depreciated under thestraight-line method. The existing assembly line is expected tohave a usable life of 4 more years. The new assembly line costs$120,000; requires $8,000 in installation costs and $5,000 intraining fees; it has a 4-year usable life and would be depreciatedunder the straight-line method. The new assembly line will increaseoutput and thereby raises sales by $10,000 per year and will reduceproduction expenses by $5,000 per year. The existing assembly linecan currently be sold for $15,000. To support the increasedbusiness resulting from installation of the new assembly line,accounts payable would increase by $5,000 and accounts receivableby $12,000. At the end of 4 years, the existing assembly line isexpected to have a market value of $4,000; the new assembly linewould be sold to net $15,000 before taxes. Finally, to install thenew assembly line, the firm would have to borrow $80,000 at 10%interest from its local bank, resulting in additional interestpayments of $8,000 per year. The firm pays 21% taxes and itsshareholders require 10% return.
Show your work! do not use excel.
(A)     (6 points) What is the initial cashoutlay for this replacement project?
(B)      (5 points) What is theoperating cash flow of the project?
(C)      (5 points) What is theterminal cash flow of the project?
(D)     (4 points) Should you replace theexisting assembly line? Provide all the details.

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3.6 Ratings (630 Votes)

a INITIAL CASH OUTLAY FOR THIS REPLACEMENT PROJECT A Cost of new equipment 120000 B Installation Cost 8000 C Trainning Fees 5000 D Current market Value of old equipment 15000 E Depreciation of old equipment in first two years 28667 90000400062 F Current book value of old equipment 61333 9000028667 G Loss on sale of old equipment 46333 6133315000 H Tax savings from sale See Answer

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Macon Company is considering a new assembly line to replace theexisting assembly line. The existing assembly line was installed 2years ago at a cost of $90,000; it was being depreciated under thestraight-line method. The existing assembly line is expected tohave a usable life of 4 more years. The new assembly line costs$120,000; requires $8,000 in installation costs and $5,000 intraining fees; it has a 4-year usable life and would be depreciatedunder the straight-line method. The new assembly line will increaseoutput and thereby raises sales by $10,000 per year and will reduceproduction expenses by $5,000 per year. The existing assembly linecan currently be sold for $15,000. To support the increasedbusiness resulting from installation of the new assembly line,accounts payable would increase by $5,000 and accounts receivableby $12,000. At the end of 4 years, the existing assembly line isexpected to have a market value of $4,000; the new assembly linewould be sold to net $15,000 before taxes. Finally, to install thenew assembly line, the firm would have to borrow $80,000 at 10%interest from its local bank, resulting in additional interestpayments of $8,000 per year. The firm pays 21% taxes and itsshareholders require 10% return.Show your work! do not use excel.(A) (6 points) What is the initial cashoutlay for this replacement project?(B) (5 points) What is theoperating cash flow of the project?(C) (5 points) What is theterminal cash flow of the project?(D) (4 points) Should you replace theexisting assembly line? Provide all the details.