The TP Company is looking to replace an existing machine with a new, more efficient version....

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The TP Company is looking to replace an existing machine with anew, more efficient version. TP feels the new will extend theproduction life by one year while increasing cash flows. The newmachine will cost $150,000 today and have a 6 year productionlife.It will be depreciated as 5-year MARCS property with anestimated salvage value of $20,000 at the end of its productionlife. The project will also set aside $6,000 for working capital.The old machine had an estimated production life of seven years,had originally cost $75,000 and was being depreciated as 5-yearstraight-line. It is currently 2 years old and could be sold for$30,000 today. TP estimated that if they kept, they would sell itfor $10,000 at the end of its production life. The new is estimatedto produce cash revenue of $160,000 per year and have cash expensesof $67,500 per year (excluding depreciation and taxes) for itsproduction life. TP has a 35% tax rate and requires a 15% return onthis investment. Use NPV and determine if they should invest.

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Old Machine book value Book value purchase priceremaining lifetotal life 7500035 45000 Time line 0 1 2 3 4 5 6 Proceeds from sale of existing asset selling price 1 tax rate 19500 Tax shield on existing asset book value Book value tax rate 15750 Cost of new machine See Answer

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The TP Company is looking to replace an existing machine with anew, more efficient version. TP feels the new will extend theproduction life by one year while increasing cash flows. The newmachine will cost $150,000 today and have a 6 year productionlife.It will be depreciated as 5-year MARCS property with anestimated salvage value of $20,000 at the end of its productionlife. The project will also set aside $6,000 for working capital.The old machine had an estimated production life of seven years,had originally cost $75,000 and was being depreciated as 5-yearstraight-line. It is currently 2 years old and could be sold for$30,000 today. TP estimated that if they kept, they would sell itfor $10,000 at the end of its production life. The new is estimatedto produce cash revenue of $160,000 per year and have cash expensesof $67,500 per year (excluding depreciation and taxes) for itsproduction life. TP has a 35% tax rate and requires a 15% return onthis investment. Use NPV and determine if they should invest.