Problem 11-13 Replacement Analysis The Everly Equipment Company's flange-lipping machine was purchased 5 years ago for $100,000. It...

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Problem 11-13
Replacement Analysis
The Everly Equipment Company's flange-lipping machine waspurchased 5 years ago for $100,000. It had an expected life of 10years when it was bought and its remaining depreciation is $10,000per year for each year of its remaining life. As olderflange-lippers are robust and useful machines, this one can be soldfor $20,000 at the end of its useful life.
A new high-efficiency digital-controlled flange-lipper can bepurchased for $150,000, including installation costs. During its5-year life, it will reduce cash operating expenses by $55,000 peryear, although it will not affect sales. At the end of its usefullife, the high-efficiency machine is estimated to be worthless.MACRS depreciation will be used, and the machine will bedepreciated over its 3-year class life rather than its 5-yeareconomic life, so the applicable depreciation rates are 33.33%,44.45%, 14.81%, and 7.41%.
The old machine can be sold today for $50,000. The firm's taxrate is 35%, and the appropriate cost of capital is 14%.
If the new flange-lipper is purchased, what is the amount ofthe initial cash flow at Year 0? Round your answer to the nearestwhole dollar.
$

What are the incremental net cash flows that will occur at theend of Years 1 through 5? Do not round intermediate calculations.Round your answers to the nearest whole dollar.
CF₁ $
CF₂ $
CF₃ $
CF₄ $
CF₅ $

What is the NPV of this project? Do not round intermediatecalculations. Round your answer to the nearest whole dollar.
$

Should Everly replace the flange-lipper?
-Select-YesNoItem 8

Answer & Explanation Solved by verified expert

3.8 Ratings (525 Votes)

Time line		0	1	2	3	4	5
Proceeds from sale of existing asset	=selling price* ( 1 -tax rate)	32500
Tax shield on existing asset book value	=Book value * tax rate	17500

Cost of new machine		-150000

= a. Initial Investment outlay		-100000

3 years MACR rate			33.33%	44.45%	14.81%	7.41%	0.0000%

Savings			55000	55000	55000	55000	55000


-Depreciation	=Cost of machine*MACR%		-49995	-66675	-22215	-11115	0

=Pretax cash flows			5005	-11675	32785	43885	55000
-taxes	=(Pretax cash flows)*(1-tax)		3253.25	-7588.75	21310.25	28525.25	35750
+Depreciation			49995	66675	22215	11115	0
=after tax operating cash flow			53248.25	59086.25	43525.25	39640.25	35750




+Tax shield on salvage book value	=Salvage value * tax rate						0
=Terminal year after tax cash flows							0

Total Cash flow for the period		-100000	53248.25	59086.25	43525.25	39640.25	35750
Discount factor=	(1+discount rate)^corresponding period	1	1.14	1.2996	1.481544	1.6889602	1.9254146
Discounted CF=	Cashflow/discount factor	-100000	b. 46708.991	c. 45464.9508	d. 29378.304	e. 23470.21	f.18567.43
g. NPV=	Sum of discounted CF=	63589.8859

Buy new equipment as NPV is positive

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Transcribed Image Text

Problem 11-13Replacement AnalysisThe Everly Equipment Company's flange-lipping machine waspurchased 5 years ago for $100,000. It had an expected life of 10years when it was bought and its remaining depreciation is $10,000per year for each year of its remaining life. As olderflange-lippers are robust and useful machines, this one can be soldfor $20,000 at the end of its useful life.A new high-efficiency digital-controlled flange-lipper can bepurchased for $150,000, including installation costs. During its5-year life, it will reduce cash operating expenses by $55,000 peryear, although it will not affect sales. At the end of its usefullife, the high-efficiency machine is estimated to be worthless.MACRS depreciation will be used, and the machine will bedepreciated over its 3-year class life rather than its 5-yeareconomic life, so the applicable depreciation rates are 33.33%,44.45%, 14.81%, and 7.41%.The old machine can be sold today for $50,000. The firm's taxrate is 35%, and the appropriate cost of capital is 14%.If the new flange-lipper is purchased, what is the amount ofthe initial cash flow at Year 0? Round your answer to the nearestwhole dollar.$What are the incremental net cash flows that will occur at theend of Years 1 through 5? Do not round intermediate calculations.Round your answers to the nearest whole dollar.CF1$CF2$CF3$CF4$CF5$What is the NPV of this project? Do not round intermediatecalculations. Round your answer to the nearest whole dollar.$Should Everly replace the flange-lipper? -Select-YesNoItem 8