DeYoung Entertainment Enterprises is considering replacing the latex molding machine it uses to fabricate rubber chickens with a newer, more efficient model. The old machine has a book value of $800,000 and a remaining useful life of 5 years. The current machine would be worn out and worthless in 5 years, but DeYoung can sell it now to a Halloween mask manufacturer for $270,000. The old machine is being depreciated by $160,000 per year for each year of its remaining life. The new machine has a purchase price of $1,185,000, an estimated useful life and MACRS class life of 5 years, and an estimated salvage value of $105,000. The applicable depreciation rates are 20.00%, 32.00%, 19.20%, 11.52 %, 11.52 %, and 5.76%. Being highly efficient, it is expected to economize on electric power usage, labor, and repair costs, and, most importantly, to reduce the number of defective chickens. In total, an annual savings of $250,000 will be realized if the new machine is installed. The company's marginal tax rate is 35% and the project cost of capital is 16%. a. What is the initial net cash flow if the new machine is purchased and the old one is replaced? Round your answer to the nearest dollar. $ b. Calculate the annual depreciation allowances for both machines, and compute the change in the annual depreciation expense if the replacement is made. Do not round intermediate calculations. Round your answers to the nearest dollar. Year 1 2 3 4 5 CF3 CF4 CF5 Depreciation Allowance, New $ $ NPV: $ $ $ c. What are the incremental net cash flows in Years 1 through 5? Do not round intermediate calculations. Round your answers to the nearest dollar. CF1 CF2 $ $ Depreciation Allowance, Old $ d. Should the firm purchase the new machine? -Select- V $ Change in Depreciation. Support your answer. Do not round intermediate calculations. Round your answer to the nearest dollar.
DeYoung Entertainment Enterprises is considering replacing the latex molding machine it uses to fabricate rubber chickens with a newer, more efficient model. The old machine has a book value of $800,000 and a remaining useful life of 5 years. The current machine would be worn out and worthless in 5 years, but DeYoung can sell it now to a Halloween mask manufacturer for $270,000. The old machine is being depreciated by $160,000 per year for each year of its remaining life. The new machine has a purchase price of $1,185,000, an estimated useful life and MACRS class life of 5 years, and an estimated salvage value of $105,000. The applicable depreciation rates are 20.00%, 32.00%, 19.20%, 11.52 %, 11.52 %, and 5.76%. Being highly efficient, it is expected to economize on electric power usage, labor, and repair costs, and, most importantly, to reduce the number of defective chickens. In total, an annual savings of $250,000 will be realized if the new machine is installed. The company's marginal tax rate is 35% and the project cost of capital is 16%. a. What is the initial net cash flow if the new machine is purchased and the old one is replaced? Round your answer to the nearest dollar. $ b. Calculate the annual depreciation allowances for both machines, and compute the change in the annual depreciation expense if the replacement is made. Do not round intermediate calculations. Round your answers to the nearest dollar. Year 1 2 3 4 5 CF3 CF4 CF5 Depreciation Allowance, New $ $ NPV: $ $ $ c. What are the incremental net cash flows in Years 1 through 5? Do not round intermediate calculations. Round your answers to the nearest dollar. CF1 CF2 $ $ Depreciation Allowance, Old $ d. Should the firm purchase the new machine? -Select- V $ Change in Depreciation. Support your answer. Do not round intermediate calculations. Round your answer to the nearest dollar.
Financial Management: Theory & Practice
16th Edition
ISBN:9781337909730
Author:Brigham
Publisher:Brigham
Chapter11: Cash Flow Estimation And Risk Analysis
Section: Chapter Questions
Problem 4P: Although the Chen Company’s milling machine is old, it is still in relatively good working order and...
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Transcribed Image Text:DeYoung Entertainment Enterprises is considering replacing the latex molding machine it uses to fabricate rubber chickens with a newer, more efficient model. The old machine has a book value of $800,000 and a
remaining useful life of 5 years. The current machine would be worn out and worthless in 5 years, but DeYoung can sell it now to a Halloween mask manufacturer for $270,000. The old machine is being depreciated by
$160,000 per year for each year of its remaining life.
The new machine has a purchase price of $1,185,000, an estimated useful life and MACRS class life of 5 years, and an estimated salvage value of $105,000. The applicable depreciation rates are 20.00%, 32.00%,
19.20%, 11.52%, 11.52%, and 5.76%. Being highly efficient, it is expected to economize on electric power usage, labor, and repair costs, and, most importantly, to reduce the number of defective chickens. In total, an
annual savings of $250,000 will be realized if the new machine is installed. The company's marginal tax rate is 35% and the project cost of capital is 16%.
a. What is the initial net cash flow if the new machine is purchased and the old one is replaced? Round your answer to the nearest dollar.
$
b. Calculate the annual depreciation allowances for both machines, and compute the change in the annual depreciation expense if the replacement is made. Do not round intermediate calculations. Round your answers to
the nearest dollar.
Year
1
2
3
4
5
Depreciation
Allowance, New
$
$
$
$
NPV: $
$
$
$
Dep eciation
Allowance, Old
$
$
$
$
$
$
d. Should the firm purchase the new machine?
-Select- V
$
$
c. What are the incremental net cash flows in Years 1 through 5? Do not round intermediate calculations. Round your answers to the nearest dollar.
CF1
CF2
CF3
CF4
CF5
$
$
$
Change in
Depreciation
Support your answer. Do not round intermediate calculations. Round your answer to the nearest dollar.
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