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Acne Products is considering a replacement for its existing packaging machine. The existing machine cost $100,000 at the time of its purchase five years ago

Acne Products is considering a replacement for its existing packaging machine. The existing machine cost $100,000 at the time of its purchase five years ago and it now has a market value of $65,000. It has a remaining life of five years and is being depreciated on a straight line basis upon its original life of ten years and its estimated final salvage value to be zero. At present, the firm believes that the existing machine will be worthless five years from today (i.e. the end of its useful life).

A new operationally efficient packaging machine costs $150,000 and has a useful life of five years with a final salvage value estimated to be zero. It is expected to reduce operating costs by $50,000 annually. The firm also uses straight line depreciation to estimate its annual depreciation. The firms tax rate is 40 percent.

  1. Calculate the initial net cash outflow at time=0 if the firm decides to replace the old machine (i.e. buy the new one and sell out the existing one).
  2. Calculate the after-tax operating cash flows over the next five years if the firm decides to replace the old machine.

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