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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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Finance

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 $160,000, including installation costs. During its5-year life, it will reduce cash operating expenses by $45,000 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%.

  1. 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.
    $



  5. 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$

  7. 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
4.4 Ratings (719 Votes)

Book value old machine= (purchase price)*remaining life/total life
= (100000)*5/10
= 50000
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 -160000
=a. Initial Investment outlay -110000
3 years MACR rate 33.33% 44.45% 14.81% 7.41% 0.00%
Savings 45000 45000 45000 45000 45000
-Depreciation =Cost of machine*MACR% -53328 -71120 -23696 -11856 0
=Pretax cash flows -8328 -26120 21304 33144 45000
-taxes =(Pretax cash flows)*(1-tax) -5413.2 -16978 13847.6 21543.6 29250
+Depreciation 53328 71120 23696 11856 0
=after tax operating cash flow 47914.8 54142 37543.6 33399.6 29250
+Tax shield on salvage book value =Salvage value * tax rate 0
=Terminal year after tax cash flows 0
b - f. Total Cash flow for the period -110000 47915 54142 37544 33400 29250
Discount factor= (1+discount rate)^corresponding period 1 1.14 1.2996 1.481544 1.6889602 1.9254146
Discounted CF= Cashflow/discount factor -110000 42030.52632 41660.511 25340.861 19775.244 15191.533
g. NPV= Sum of discounted CF= 33999

Accept new machine
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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 $160,000, including installation costs. During its5-year life, it will reduce cash operating expenses by $45,000 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

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