Palmetto Ag. Inc. recently purchased a new harvester. The new machine cost $180,000 and it is...

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Palmetto Ag. Inc. recently purchased a new harvester. The newmachine cost $180,000 and it is expected to generate net after-taxoperating cash flows, including depreciation, of $50,000 per year.The machine has a five year expected life. The expected salvagevalues after-tax adjustments for the machine are given below, andthe company’s WACC is 11%. Based on the information below, shouldthe firm operate the machine until the end of its 5 year physicallife? If not, then when is its optimal economic life?
                       Year               Annual Net operating cashflow         SalvageValue
                       0                     -$180,000                                           $180,000
                       1                         50,000                                           140,000
                       2                         50,000                                           112,000
                       3                         50,000                                               87,000
                       4                         50,000                                               42,000
                       5                         50,000                                                       0

Answer & Explanation Solved by verified expert

4.0 Ratings (738 Votes)

The Cash flows andNPV are computed as belowUseful life012345YearCash See Answer

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Palmetto Ag. Inc. recently purchased a new harvester. The newmachine cost $180,000 and it is expected to generate net after-taxoperating cash flows, including depreciation, of $50,000 per year.The machine has a five year expected life. The expected salvagevalues after-tax adjustments for the machine are given below, andthe company’s WACC is 11%. Based on the information below, shouldthe firm operate the machine until the end of its 5 year physicallife? If not, then when is its optimal economic life? Year Annual Net operating cashflow SalvageValue 0 -$180,000 $180,000 1 50,000 140,000 2 50,000 112,000 3 50,000 87,000 4 50,000 42,000 5 50,000 0