Question
ACORE incorporated is also considering the replacement of a machine which it currently owns. The machine, purchased two years ago, had a useful life of
ACORE incorporated is also considering the replacement of a machine which it currently owns. The machine, purchased two years ago, had a useful life of six years at the time of purchase. It was purchased for $216,000 has no salvage value, and is being depreciated on a straight line basis. Sales of the product produced by the machine are $96,000 annually. The cost of operating the machine is $42,000 annually. The machine can be sold for $168,000. The new machine can be purchased for $240,000. It has a useful life of four years, will be depreciated on a straight line basis, and will have a salvage value of $24,000. Because this improved machine produces a higher quality product at reduced cost, it is estimated that sales will be increased to $114,000 and costs reduced to $30,000 if the machine is installed. The firm's tax rate is 20% and the required rate of return is 14%. No additional working capital will be required if the machine is replaced.
a. What is the tax effect of selling the old machine?
b. What is the initial outlay from selling the old machine and purchasing the new machine?
c. What is the change in recoveries?
d. What is the incremental annual cash flow from replacing the old machine?
e. What is the net present value of replacing the old machine?
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