Your company is considering the replacing an old machine with a more efficient model. The new machine costs $39,500,will last for 7 years and save $12,900 per year in expenses. The discount rate is 18% and the tax rate is 26%. The machinewill be depreciated on a straight line basis to zero. The old machine is fully depreciated and can be sold today for $2,700.A) what is the amount of initial investment required?B) what is the after-tax gain on the sale of the old machine? The old machine is fully depreciated.C) what is the amount of operating cash flow (OCF) per year?D) what is the NPV of the project?

NPV is also known as Net Present Value.. It is a capital budgeting technique which helps in decision…

Answered: Your company is considering the…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter9: Capital Budgeting And Cash Flow Analysis

Section: Chapter Questions

Problem 10P

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Tyrell Corp. is considering replacing a machine. The old one is currently being depreciated at $70,000 per year (straight-line), and is scheduled to end in five years with no remaining book value. If you don't replace it, you will be lucky to get it removed for the amount you could salvage it for, so you don't expect any profit in five years. If you replace the old machine now, you believe you can salvage it for $375,000 and buy a new machine for $850,000, plus $25,000 shipping fee and another $25,000 for installation. The new machine will not change the revenue or NOWC, but it will reduce the operating costs of the company by $145,000 per year. The new machine will be depreciated using the three-year MACRS schedule (the table is provided on the Moodle for your convenience). The useful life of this machine is five years, and it is expected that the machine can be sold at $20,000 at the end of the five years. Assume a tax rate of 25% and the cost of capital for the company is 8%.…
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(Ignore income taxes in this problem.) Your Company has some equipment that can either be repaired right now for $40,000 or sold for $13,000 scrap value. As an alternative, Your Company could buy new equipment for $145,000. Both pieces of equipment would last 8 years. The annual operating expenses of the new equipment would be $6,500 less than the operating costs of the old machine. In addition, the new machine would be able to produce 100 more units that can be sold for a contribution margin of $80 per unit. The new equipment is expected to have a $14,000 salvage value in 8 years. Your Company discount rate is 7%. What is the net present value of the decision to buy the new equipment instead of repairing the old equipment? O $400 O $3,146 O $2.728 O ($5,421)

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