Question
ABC Inc. wishes to buy new machinery that would cost $160,000, but it would lead to increased output, higher sales, and higher costs. Moreover, the
ABC Inc. wishes to buy new machinery that would cost $160,000, but it would lead to increased output, higher sales, and higher costs. Moreover, the firm would receive $100,000 after taxes for the old machine. The new machine would result in sales of $120,000 per year versus old sales of $70,000, and the new costs would be $40,000 versus old costs of $20,000. Finally, the old machine was being depreciated at the rate of $10,000 per year, but the new machine would have $30,000 of annual depreciation. The marginal tax rate is 40 percent and WACC is 10 percent. Based on these figures, and assuming the new and old machines both have a life of four years, find the incremental cash flows.
Problem 3 - Evaluating a Replacement Project | |||||
Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | |
Acquisition - 5 Year Life | |||||
New Machinery | ?? | ||||
Sale - Old Machine | ?? | ||||
Total Initial Investment | ?? | ||||
New Sales | ?? | ?? | ?? | ?? | |
Old Sales | ?? | ?? | ?? | ?? | |
Change in Sales | ?? | ?? | ?? | ?? | |
New Costs | ?? | ?? | ?? | ?? | |
Old Costs | ?? | ?? | ?? | ?? | |
Change in Costs | ?? | ?? | ?? | ?? | |
New Depreciation | ?? | ?? | ?? | ?? | |
Old Depreciation | ?? | ?? | ?? | ?? | |
Change in Depreciation | ?? | ?? | ?? | ?? | |
Earnings Before Income Tax (EBIT) | ?? | ?? | ?? | ?? | |
Tax Rate | 40.00% | 40.00% | 40.00% | 40.00% | |
Total Taxes | ?? | ?? | ?? | ?? | |
Net Operating Profits (NOPAT) | ?? | ?? | ?? | ?? | |
Add Back Depreciation | ?? | ?? | ?? | ?? | |
Operating Cash Flow | ?? | ?? | ?? | ?? | |
Net Operating Working Capital | ?? | ?? | ?? | ?? | ?? |
Increase in NOWC | ?? | ?? | ?? | ?? | ?? |
Total Annual Project Cash Flow | ?? | ?? | ?? | ?? | ?? |
Free Cash Flow | ?? | ?? | ?? | ?? | ?? |
Required Rate of Return (WACC) | ?? | ||||
NPV | ?? | ||||
IRR | ?? |
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