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 35%
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

3.9 Ratings (466 Votes)

a Cost of the new machine 120000 Sale value of the old machine 35000 Book value 55005 27500 Gain on sale 7500 Tax on gain at 35 2625 After tax sale value of old machine 350002625 32375 Initial cash flow at Year 0 87625 b 0 1 2 3 4 5 Savings 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 35%*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