Top Cat Ltd is a company that supplies pet food to the dogs and cats of...

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Finance

Top Cat Ltd is a company that supplies pet food to the dogs andcats of Australia. The company’s
marginal tax rate is 30%. The business is considering replacinga five-year-old manually operated
tuna processing machine that originally cost $100,000, presentlyhas a book value of $50,000, and
could be sold for $120,000. This machine is currently beingdepreciated using the straight-line
method down to a terminal value of zero over the next fiveyears, generating depreciation of
$10,000 per year. The fully automated replacement machine wouldcost $250,000, have a five-
year expected life over which it would be depreciated down usingthe straight-line method, and
have no salvage value at the end of five years.
Other information:
The new machine would produce power savings before depreciationand taxes of $90,000 per year.
Installation charge for the new machine is $10,000.
Investment in inventories needs to be increased by$20,000.
The old machine was operated by one operator who earned $30,000per year.
Annual cost of maintenance with the old machine was $10,000 peryear.
Annual cost of maintenance with the new machine is expected tobe $40,000 per year.
The required rate of return is 10% per year.
A preliminary feasibility study incurred sunk costs of$5,000.
Required
a      Calculate the initial investmentassociated with the replacement project.
Calculate the incremental operating net cash inflows associatedwith the proposed replacement machine.
c      Determine the terminal cash flowexpected from the proposed machine replacement.
d      Calculate the pay-back period ofthe proposed replacement machine.
e      Calculate the net present valueof the proposed replacement machine.

Answer & Explanation Solved by verified expert

4.3 Ratings (780 Votes)

a Cost of the new machine 250000 Installation cost 10000 Total cost of the new machine 260000 Sale value of the old machine 120000 Book value of the old machine 50000 Gain on sale See Answer

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Transcribed Image Text

Top Cat Ltd is a company that supplies pet food to the dogs andcats of Australia. The company’smarginal tax rate is 30%. The business is considering replacinga five-year-old manually operatedtuna processing machine that originally cost $100,000, presentlyhas a book value of $50,000, andcould be sold for $120,000. This machine is currently beingdepreciated using the straight-linemethod down to a terminal value of zero over the next fiveyears, generating depreciation of$10,000 per year. The fully automated replacement machine wouldcost $250,000, have a five-year expected life over which it would be depreciated down usingthe straight-line method, andhave no salvage value at the end of five years.Other information:The new machine would produce power savings before depreciationand taxes of $90,000 per year.Installation charge for the new machine is $10,000.Investment in inventories needs to be increased by$20,000.The old machine was operated by one operator who earned $30,000per year.Annual cost of maintenance with the old machine was $10,000 peryear.Annual cost of maintenance with the new machine is expected tobe $40,000 per year.The required rate of return is 10% per year.A preliminary feasibility study incurred sunk costs of$5,000.Requireda Calculate the initial investmentassociated with the replacement project.Calculate the incremental operating net cash inflows associatedwith the proposed replacement machine.c Determine the terminal cash flowexpected from the proposed machine replacement.d Calculate the pay-back period ofthe proposed replacement machine.e Calculate the net present valueof the proposed replacement machine.