Question
1-XYZ Co. is considering the purchase of a new (digital) equipment to replace the old (manual) equipment currently being used in its production process. The
1-XYZ Co. is considering the purchase of a new (digital) equipment to replace the old (manual) equipment currently being used in its production process. The data regarding the new and the old equipments are written below:
The old (manual) equipment had cost $800,000 3 years ago, and it can be used for five more years. It has a current salvage value of $410,000. If the old equipment is held until the end of its useful life, it would not have any salvage value.
The new (digital) equipment costs $570,000, and $30,000 must be paid for installation. Its final salvage value is estimated to be $70,000 at the end of its five-year useful life.
Both the old and the new machines are depreciated according to the straight-line method.
The new machine will increase operating revenues by $100,000 annually and increase operating expenses by $10,000 annually. Net working capital expenses will decrease by $50,000 over the life of the project.
Income taxes on incremental profits are paid at a 30 percent rate.
With theinformationabove, calculate;
a) Initial cash outflow,
b) Interim incremental net cash flows for years 1 through 5,
c) Terminal year incremental net cash flow.
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