Question
4. Bulldog Incorporated. Purchased a leather-cutting machine seven years ago. The cost of the machine was $11,200. It was expected to be used for 10
4. Bulldog Incorporated. Purchased a leather-cutting machine seven years ago. The cost of the machine was $11,200. It was expected to be used for 10 years. The machine has been depreciated on a straight-line basis with an estimated salvage value of $1,200. The machine can be sold for $3,500 today.
Bulldog is considering the purchase of a new leather-cutting machine to replace the existing machine. Having the new machine will result in an increase of revenue of $13,000, but the operating cost will also increase by $6,000 for three years. It costs $14,000, with an expected salvage value of $2,000 at the end of the third year. The new machine will be depreicated using the MACRS method, and is considering a three-year property. There will be an increase of $1,700 in net working capital. Bulldogs tax rate is 40%, and cost of capital is 16%.
- Compute the depreciation for the old machine and the new machine for each of the next three years.
- The after-tax selling price of the old machine is $3,780 today. What is the net initial investment for the new machine?
- The expected alter-tax salvage value of the new machine is $1,620. Compute the expected net cash flow at the end of year 3. (Note: You are asked to find CF3 only, not NPV)
*answers not in excel*
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