The Bigbee Bottling Company is contemplating the replacement of one of its bottling machines with a newer and more efficient one. The old machine has a book value of $600,000 and a remaining useful life of 5 years. The firm does not expect to realize any return from scrapping the old machine in 5 years, but it can sell it now to another firm in the industry for $265,000. The old machine is being depreciated toward a zero salvage value, or by $120,000 per year, using the straight-line method. The new machine has a purchase price of $1,175,000, an estimated useful life 6 year and fall under 5 years MACRS, and an estimated salvage value of $145,000. The applicable depreciation rates are 20 percent, 32 percent, 19 percent, 12 percent, 11 percent, and 6 percent. It is expected to economize on electric power usage, labor, and repair costs, as well as to reduce the number of defective bottles. In total, an annual savings of $255,000 will be realized if the new machine is installed. The company’s marginal tax rate is 35 percent and it has a 12 percent cost of capital. Calculate the relevant cash flows?
The Bigbee Bottling Company is contemplating the replacement of one of its bottling machines with a newer
and more efficient one. The old machine has a book value of $600,000 and a remaining useful life of 5 years.
The firm does not expect to realize any return from scrapping the old machine in 5 years, but it can sell it
now to another firm in the industry for $265,000. The old machine is being
salvage value, or by $120,000 per year, using the straight-line method. The new machine has a purchase
price of $1,175,000, an estimated useful life 6 year and fall under 5 years MACRS, and an estimated salvage
value of $145,000. The applicable depreciation rates are 20 percent, 32 percent, 19 percent, 12 percent, 11
percent, and 6 percent. It is expected to economize on electric power usage, labor, and repair costs, as well as
to reduce the number of defective bottles. In total, an annual savings of $255,000 will be realized if the new
machine is installed. The company’s marginal tax rate is 35 percent and it has a 12 percent cost of capital.
Calculate the relevant cash flows?
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