Problem 11-14
Replacement Analysis

DeYoung Entertainment Enterprises is considering replacing thelatex molding machine it uses to fabricate rubber chickens with anewer, more efficient model. The old machine has a book value of$600,000 and a remaining useful life of 5 years. The currentmachine would be worn out and worthless in 5 years, but DeYoung cansell it now to a Halloween mask manufacturer for $265,000. The oldmachine is being depreciated by $120,000 per year for each year ofits remaining life.

The new machine has a purchase price of $1,160,000, an estimateduseful life and MACRS class life of 5 years, and an estimatedsalvage value of $105,000. The applicable depreciation rates are20.00%, 32.00%, 19.20%, 11.52%, 11.52%, and 5.76%. Being highlyefficient, it is expected to economize on electric power usage,labor, and repair costs, and, most importantly, to reduce thenumber of defective chickens. In total, an annual savings of$255,000 will be realized if the new machine is installed. Thecompany's marginal tax rate is 35% and the project cost of capitalis 15%.

1. What is the initial net cash flow if the new machine ispurchased and the old one is replaced? Round your answer to thenearest dollar.
   $
2. 
   
3. 
   
4. 
   
5. Calculate the annual depreciation allowances for both machines,and compute the change in the annual depreciation expense if thereplacement is made. Do not round intermediate calculations. Roundyour answers to the nearest dollar.

   Year	Depreciation Allowance, New	Depreciation Allowance, Old	Change in Depreciation
   1	$	$	$
   2	$	$	$
   3	$	$	$
   4	$	$	$
   5	$	$	$

6. 
   
7. What are the incremental net cash flows in Years 1 through 5?Do not round intermediate calculations. Round your answers to thenearest dollar.

   CF1	$
   CF2	$
   CF3	$
   CF4	$
   CF5	$

8. 
   
9. Should the firm purchase the new machine?
   -Select-YesNoItem 22
   
   Support your answer. Do not round intermediate calculations. Roundyour answer to the nearest dollar.
   
   NPV: $