Question
2-A company is considering replacing the latex molding machine it uses to fabricate rubber chickens with a newer, more efficient model. The old machine has
2-A company is considering replacing the latex molding machine it uses to fabricate rubber chickens with a newer, more efficient model. The old machine has a book value of $450,000 and a remaining useful life of 5 years. The current machine would be worn out and worthless in 5 years, but the company can sell it now to a Halloween mask manufacturer for $135,000. The old machine is being depreciated by $90,000 per year, using the straight-line method.
The new machine has a purchase price of $775,000, an estimated useful life and MACRS class life of 5 years, and an estimated salvage value of $105,000. The applicable depreciation rates are 20.00%, 32.00%, 19.20%, 11.52%, 11.52%, and 5.76%. Being highly efficient, it is expected to economize on electric power usage, labor, and repair costs, and, most importantly, to reduce the number of defective chickens. In total, an annual savings of $185,000 will be realized if the new machine is installed. The companys marginal tax rate is 35%, and it has a 12% WACC.
a) What is the initial outlay if the new machine is purchased and the old one is replaced?
b) Calculate the annual depreciation allowances for both machines, and compute the change in the annual depreciation expense if the replacement is made.
c) What are the cash flows in Years 1 through 5 to be used to calculate the NPV?
d) Should the firm purchase the new machine? Support your answer.
NEED this to show all formulas and calculations. Thank you in advance and I will rate!
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started