XYZ Company’s machine was purchased 5 years ago for $55,000. It had an expected life of...

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XYZ Company’s machine was purchased 5 years ago for$55,000. It had an expected life of 10 years when it was bought,and its remaining depreciation is $5,500 per year for each year ofits remaining life and can be sold for $20,000 at the end of itsuseful life. A new machine can be purchased for $120,000, includingthe installation costs. During its 5-year life, it will reduce cashoperating expenses by $30,000 per year. Sales revenue will not beaffected. At the end of its useful life, the machine is estimatedto be sold at $10,000. We will use MARCS depreciation, and themachine will be depreciated over its 5-year property class life.The old machine can be sold today for $35,000.
The tax rate is 25%
WACC is 16%
a) what is the amount of the initial cash flow at Year 0if the new machine is purchased?
b)Calculate the after-tax salvage value of the newmachine at the end of the project?
c)Calculate the incremental cash flows that will occurat the end of years 1-5?
*Use excel cell reference for the questions for theabove questions

Answer & Explanation Solved by verified expert

4.3 Ratings (574 Votes)

a Amount of initial cash flow if new machine is purchased at year 0 would be as follows By purchasing the new machine we would incur 120000 But if we purchase the new machine we would sell the old machine that will result in inflow of 35000 But this value is greater than the old machines book value which is 55000 less 5 years depreciation which will come out to be See Answer

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XYZ Company’s machine was purchased 5 years ago for$55,000. It had an expected life of 10 years when it was bought,and its remaining depreciation is $5,500 per year for each year ofits remaining life and can be sold for $20,000 at the end of itsuseful life. A new machine can be purchased for $120,000, includingthe installation costs. During its 5-year life, it will reduce cashoperating expenses by $30,000 per year. Sales revenue will not beaffected. At the end of its useful life, the machine is estimatedto be sold at $10,000. We will use MARCS depreciation, and themachine will be depreciated over its 5-year property class life.The old machine can be sold today for $35,000.*The tax rate is 25%*WACC is 16%a) what is the amount of the initial cash flow at Year 0if the new machine is purchased?b)Calculate the after-tax salvage value of the newmachine at the end of the project?c)Calculate the incremental cash flows that will occurat the end of years 1-5?*Use excel cell reference for the questions for theabove questions