07/24/2018

INFORMATION OLD MACHINE:

Original Purchase Price

$550,000.00

Original Life

10 YEARS

Remaining Life

5 YEARS

Straight line depreciation in use

Salvage Value

$50,000.00

Current Fair Market Value

$260,000.00

INFORMATION NEW MACHINE A:

Purchase Price

$895,000.00

Estimated Life

5 YEARS

Use Straight Line Depreciation Method

Estimated Salvage Value

$10,000.00

Estimated Net Operating Cash Flow Increase/Decrease (Prior to Depreciation and Taxes)

End of Year 1

$100,000.00

End of Year 2

$150,000.00

End of Year 3

$250,000.00

End of Year 4

$200,000.00

End of Year 5

$200,000.00

ASSUMPTIONS:

Tax Rate: 40%

WACC Rate: 7%

If you keep the old machine, the NPV is:

A.118,567

B.117,653

C.30,489

D.300,410

QUESTION 2

1. If you sell the old machine and buy new machine A, the NPV will be:
2. 10,619
3. -4,995
4. -5,859
5. 2,907

QUESTION 3

1. What decision do you suggest?
2. A.Keep the old machine and do not buy the new machine.B.Sell the old machine and buy the new machine.

QUESTION 4

1. The cash flow creating the least amount of risk or the cash flow we should be certain of is
2. A.The cost of the new machine.
3. B.The projected cash flow saving in year 4.
4. C.The tax benefit from depreciation
5. D.The salvage value on the new machine.