Duluth Medico purchased a digital imageprocessing machine three years ago at a cost of
$50,000. The machine had an expected life of eight
years at the time of purchase and an expected salvage
value of $5,000 at the end of the eight years. The
old machine has been slow at handling the increased
business volume, so management is considering
replacing the machine. A new machine can be purchased for $75,000, including installation costs.
Over its five-year life, the machine will reduce cash
operating expenses by $30,000 per year. Sales are
not expected to change. At the end of its useful life,the machine is estimated to be worthless. The old
machine can be sold today for $10,000. The firm’s
interest rate for project justification is known to be
15%. The firm does not expect a better machine
(other than the current challenger) to be available for
the next five years. Assuming that the economic service life of the new machine, as well as the remaining
useful life of the old machine, is five years,
(a) Determine the cash flows associated with each
option (keeping the defender versus purchasing
the challenger).
(b) Should the company replace the defender now?
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- Fisher Ferry Company operates a high speed passenger ferry service across the Mississippi River. One of its ferryboats is in poor condition. This ferry can be renovated at an immediate cost of $ 200,000. Further repairs and an overhaul of the motor will be needed five years from now at a cost of $ 100,000. In all, the ferry will be usable for 10 years if this work is done. At the end of 10 years, the ferry will have to be scrapped at a value of $ 60,000. The scrap value of the ferry right now is $ 70,000. It will cost $ 300,000 yearly to operate the ferry, and revenues will total $ 400,000 annually. As an alternative, Fisher Ferry Company can purchase a new ferryboat at a cost of $ 720,000. If the company decides to purchase the new one, the old one will be sold right away. The new ferry will have a life of 10 years, but it will require some repairs costing $ 30,000 at the end of five years. At the end of 10 years, the ferry will have a scrap value of $ 60,000. It will cost $ 210,000…arrow_forwardBuiltrite is considering purchasing a new machine that would cost $60,000 and the machine would be depreciated (straight line) down to $0 over its five-year life. At the end of four years, it is believed that the machine could be sold for $30,000. The current machine being used was purchased 3 years ago at a cost of $40,000 and it is being depreciated down to zero over its 5-year life. The current machine's salvage value now is $12,000. The new machine would increase EBDT by $56,000 annuall Builtrite's marginal tax rate is 34%. What is the TCF associated with the purchase of this new machine if it is sold at the end of year 4? Ⓒ$30,000 $23,880 $20,500 $19,800arrow_forwardThe Darlington Equipment Company purchased a machine 5 years ago at a cost of $85,000. The machine had an expected life of 10 years at the time of purchase, and it is being depreciated by the straight-line method by $8,500 per year. If the machine is not replaced, it can be sold for $5,000 at the end of its useful life. A new machine can be purchased for $170,000, including installation costs. During its 5-year life, it will reduce cash operating expenses by $45,000 per year. Sales are not expected to change. At the end of its useful life, the machine is estimated to be worthless. The new machine is eligible for 100% bonus depreciation at the time of purchase. The old machine can be sold today for $50,000. The firm's tax rate is 25%. The appropriate WACC is 9%. If the new machine is purchased, what is the amount of the initial cash flow at Year 0 after bonus depreciation is considered? Cash outflow should be indicated by a minus sign. Round your answer to the nearest dollar.$…arrow_forward
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