The supervisor of the county Department of Transportation (DOT) is considering the replacement of some machinery. This machinery has zero book value but its current market value is $820. One possible alternative is to invest in new machinery, which has a cost of $39,200. This new machinery would produce estimated annual operating cash savings of $12,600. The estimated useful life of the new machinery is four years. The DOT uses straight-line depreciation. The new machinery has an estimated salvage value of $2,020 at the end of four years. The investment in the new machinery would require an additional investment in working capital of $3,000, which would be recovered after four years. If the DOT accepts this investment proposal, disposal of the old machinery and investment in the new equipment will take place on December 31, 20x1. The cash flows from the investment will occur during the calendar years 20x2 through 20x5. Use Appendix A for your reference. Note: Use appropriate factor(s) from the tables provided. Required: Prepare a net-present-value analysis of the county DOT's machinery replacement decision. The county has a 10 percent hurdle rate. Note: Round your "Discount factors" to 3 decimal places and final answers to the nearest whole dollar. Negative amounts should be indicated by a minus sign. Acquisition cost Investment in working capital Recovery of working capital Salvage value of old machinery Salvage value of new machinery Annual operating cash savings Total cash flow Discount factor Present value Net present value $ $ Time 0 0 $ 0 $ Time 1 0 0 $ $ Time 2 0 $ 0 $ Time 3 0 $ 0 $ Time 4 0 0
The supervisor of the county Department of Transportation (DOT) is considering the replacement of some machinery. This machinery has zero book value but its current market value is $820. One possible alternative is to invest in new machinery, which has a cost of $39,200. This new machinery would produce estimated annual operating cash savings of $12,600. The estimated useful life of the new machinery is four years. The DOT uses straight-line depreciation. The new machinery has an estimated salvage value of $2,020 at the end of four years. The investment in the new machinery would require an additional investment in working capital of $3,000, which would be recovered after four years. If the DOT accepts this investment proposal, disposal of the old machinery and investment in the new equipment will take place on December 31, 20x1. The cash flows from the investment will occur during the calendar years 20x2 through 20x5. Use Appendix A for your reference. Note: Use appropriate factor(s) from the tables provided. Required: Prepare a net-present-value analysis of the county DOT's machinery replacement decision. The county has a 10 percent hurdle rate. Note: Round your "Discount factors" to 3 decimal places and final answers to the nearest whole dollar. Negative amounts should be indicated by a minus sign. Acquisition cost Investment in working capital Recovery of working capital Salvage value of old machinery Salvage value of new machinery Annual operating cash savings Total cash flow Discount factor Present value Net present value $ $ Time 0 0 $ 0 $ Time 1 0 0 $ $ Time 2 0 $ 0 $ Time 3 0 $ 0 $ Time 4 0 0
Chapter9: Capital Budgeting And Cash Flow Analysis
Section: Chapter Questions
Problem 10P
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Question
Transcribed Image Text:The supervisor of the county Department of Transportation (DOT) is considering the replacement of some machinery. This machinery
has zero book value but its current market value is $820. One possible alternative is to invest in new machinery, which has a cost of
$39,200. This new machinery would produce estimated annual operating cash savings of $12,600. The estimated useful life of the
new machinery is four years. The DOT uses straight-line depreciation. The new machinery has an estimated salvage value of $2,020 at
the end of four years. The investment in the new machinery would require an additional investment in working capital of $3,000, which
would be recovered after four years.
If the DOT accepts this investment proposal, disposal of the old machinery and investment in the new equipment will take place on
December 31, 20x1. The cash flows from the investment will occur during the calendar years 20x2 through 20x5.
Use Appendix A for your reference.
Note: Use appropriate factor(s) from the tables provided.
Required:
Prepare a net-present-value analysis of the county DOT's machinery replacement decision. The county has a 10 percent hurdle rate.
Note: Round your "Discount factors" to 3 decimal places and final answers to the nearest whole dollar. Negative amounts should
be indicated by a minus sign.
Acquisition cost
Investment in working capital
Recovery of working capital
Salvage value of old machinery
Salvage value of new machinery
Annual operating cash savings
Total cash flow
Discount factor
Present value
Net present value
$
$
Time 0
0
0
$
$
Time 1
0 $
0
$
Time 2
0
0
$
$
Time 3
0 $
0
$
Time 4
0
0
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