Question
Adam Smith is considering automating his pin factory with the purchase of a $475,000 new machine having a $30,000 salvage value in replacement of the
Adam Smith is considering automating his pin factory with the purchase of a $475,000 new machine having a $30,000 salvage value in replacement of the old machine. Shipping and installation would cost $6,000. The old machine was originally purchased for $200,000. It is sold with a market value of $300,000. The old machine has depreciated book value of $150,000 and zero salvage value. The pin factory requires an additional working capital of $80,000. The machine has a useful life of 4 years The firm's marginal tax rate is 40 percent. The maintenance cost is expected to occur every year at $70,000. The new machine is expected to produce a revenue of $500000 for the first year. Revenues are to be increased by 11% every year. A. Calculate depreciation of old and new machines as well as incremental depreciation? B. Estimate the relevant cash inflows for four years?
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