Birmingham Technical Productions, Inc. (BTP) is considering the replacement of its injection molding machine. The current machine is 2 years old but new technology has BTP considering the newest model.

• The old (current) machine was acquired 2 years ago and is being depreciated on a straight line basis over 8 years (6 years remaining).The annual depreciation expense is $425 per year, and its current book value is $2,500. It can be sold for $4,225 today. If the machine is not replaced, it is expected to be sold for $650 at the end of its remaining life (6 yrs).

• The new, replacement machine will cost $22,500. It is expected to be used for 6 years, and is expected to be sold for $1,100 then. It will be depreciated using MACRS (5-year class with 12 year convention).

• The new machine is expected to support an increase in sales by $3,250 per year, and with its improved electrical efficiency, it should reduce operating expenses by $2,100 per year.

• Inventories will need to increase by $3,150 and Account payable will increase by $500.

• The companys tax rate is 35%.

• BTPs Cost of Capital is 12.5%, which is the appropriate Hurdle Rate for this project.

  Using a blank Excel workbook, evaluate this project:

  1. Present the cash flows

  2. Calculate the evaluation measures.

  3. Should Birmingham Technical Productions replace the machine?