Problem Four : Kaplan Incorporated currently uses an older model BAII plus milling machine that was purchased two...

50.1K

Verified Solution

Question

Finance

Problem Four :
Kaplan Incorporated currently uses an older model BAII plusmilling machine that was
purchased two years ago for $10,000. The machine would be soldtoday for $3,000. If the old
machine is not replaced, it is expected to operate for another 4years at which time its salvage
value will be $1,200. The BAII plus currently generates revenuesof $13,000 per year. The
machine has annual operating costs of $8,000 per year. Thecompany maintains an investment of
$1,750 in operating net working capital with the oldmachine.
Kaplan Incorporated is considering acquiring a new millingmachine to replace its old milling
machine. The new milling machine has a capital cost of $12,000and an estimated useful life of 4
years and an expected salvage value of $2,000. The companyexpects the new machine to
generate total revenues of $25,000 per year. The new machinewould have operating costs of
$11,000 per year. With the new machine, the investment inoperating net working capital would
be increased to $2,500 and remain at this level until the end ofthe project.
Both machines have a CCA rate of 30%. The company’s tax rate is35%. The project has a
required rate of return of 15% per year compounded annually.
What is the NPV of the project, which replaces the old machinewith the new machine?
Please show me how to do this question on excel showingall formulas. The answer was also provided as $9,694.16. However Iwant to know how the prof got to thisanswer.

Answer & Explanation Solved by verified expert

4.1 Ratings (813 Votes)

1 In case the machine is installed today the cash outflow would be as follows Particulars Cost 12000 Disposal of old machine After TaxWorking Note 1 1950 Net cash outflow 10050 Net working capital of old machine 1750 Net working capital of new machine 2500 Total 10800 Formula used here is the sum formula in excel 2 Now we will calculate the incremental cash inflow after tax to determine See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

Problem Four :Kaplan Incorporated currently uses an older model BAII plusmilling machine that waspurchased two years ago for $10,000. The machine would be soldtoday for $3,000. If the oldmachine is not replaced, it is expected to operate for another 4years at which time its salvagevalue will be $1,200. The BAII plus currently generates revenuesof $13,000 per year. Themachine has annual operating costs of $8,000 per year. Thecompany maintains an investment of$1,750 in operating net working capital with the oldmachine.Kaplan Incorporated is considering acquiring a new millingmachine to replace its old millingmachine. The new milling machine has a capital cost of $12,000and an estimated useful life of 4years and an expected salvage value of $2,000. The companyexpects the new machine togenerate total revenues of $25,000 per year. The new machinewould have operating costs of$11,000 per year. With the new machine, the investment inoperating net working capital wouldbe increased to $2,500 and remain at this level until the end ofthe project.Both machines have a CCA rate of 30%. The company’s tax rate is35%. The project has arequired rate of return of 15% per year compounded annually.What is the NPV of the project, which replaces the old machinewith the new machine?Please show me how to do this question on excel showingall formulas. The answer was also provided as $9,694.16. However Iwant to know how the prof got to thisanswer.