Bols Click here to read the eBook: Replacement Analysis REPLACEMENT ANALYSIS The Bigbee Bottling Company is contemplating the replacement of one of its botting machines with a newer and more efficient one. The old machine has a book value of $600,000 and a remaining useful le of years. The firm does not expect to realize any return from scrapping the old machine in 5 years, but it can sell it now to another form in the industry for $235,000 The old machine is being depreciated by $120,000 per year, using the straight-line method. The new machine has a purchase price of $1,100,000, an estimated useful life and MACRS class life of 5 years, and an estimated salvage value of $150,000. The applicable depreciation rates are 20%, 32%, 19%, 129, 11%, and 6%. It is expected to economize on electric power usage, labor, and repair costs, as well as to reduce the number of defective bottles. In total, an annual savings of $225,000 will be realized if the new machine is installed. The company's marginal tax rate is 35%, and it has a 12% WACC. a. What initial cash outlay is required for the new machine? Round your answer to the nearest dollar. Negative amount should be indicated by a minus sign b. Calculate the annual depreciation allowances for both machines and compute the change in the annual depreciation expense if the replacement is maon. Round your answers to Depreciation Change in Allowance, New Allowance, Old Depreciation the nearest dollar Year Depreciation 1$ 2 3 4 5 c. What are the incremental net cash flows in Years 1 through 5? Round your answers to the nearest dollar Year 1 Year 2 Year 3 Year 4 Year 5 $ d. Should the firm purchase the new machine? Support your answer. The input in the box below will not be graded, but may be reviewed and considered by your instructor e. In general, how would each of the following factors affect the investment decision, and how should each be treated? 1. The expected life of the existing machine decreases The input in the box below will not be graded, but may be reviewed and considered by your instructor NMFin c. What are the incremental net cash flows in Years 1 through 5? Round your answers to the nearest dollar. Year 1 Year 2 Year 3 Year 4 Year 5 $ $ $ $ $ d. Should the firm purchase the new machine? -Select- Support your answer. The input in the box below will not be graded, but may be reviewed and considered by your instructor. e. In general, how would each of the following factors affect the investment decision, and how should each be treated? 1. The expected life of the existing machine decreases. The input in the box below will not be graded, but may be reviewed and considered by your instructor. 2. The WACC is not constant, but is increasing as Bigbee adds more projects into its capital budget for the year. The input in the box below will not be graded, but may be reviewed and considered by your instructor
