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9. Asset Replacement The following information applies to the two fixed Old: Suppose Briggs &Stratton purchased an automated drill press 10 years ago that had
9. Asset Replacement The following information applies to the two fixed Old: Suppose Briggs &Stratton purchased an automated drill press 10 years ago that had an estimated economic original 20 year life. Annual revenues are $70,000 and annual operating ex New: life of 20 years. The drill press originally cost $1.50,000 and it's all being straight-line depreciated over its costs) are $40,000. The actual market value of this drill press currently is $40,000. expenses (i.e, fixed and variable The company is considering replacing the drill press with a new one costing $190,000. Shipping and installation charges will add an additional $10,000 to the cost. The new machine would be depreciated to zero on a straight-line basis. The new machine is expected to have a 10 -year economic life, and its actual salvage value (i.e., MV) at the end of the 10-year period is estimated to be $25,000. It will generate annual revenues of $85,000 and annual operating expenses (i.e, fixed and variable costs) of $20,000. capital is 10% and Briggs& Stratton's current marginal tax rate is 40 percent. Assume that cost of company's NWC does not change as a result of replacing the drill press. Calculate the following appropriate incremental cash flows if it's a case of Asset Replacement Cost of New Sales of Old Asset Tax effect on Sales Initial Investment Revenues -Expenses Depreciation EBIT Net Income +Depreciation Annual OCF (same number years 1-10) Sales of New Asset (Year 10) Tax effect on Sales Terminal Value
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