Cold Duck Manufacturing Inc. is a company that produces iGadgets, among several other products. Suppose that Cold Duck Manufacturing Inc. considers replacing its old machine used to make iGadgets with a more efficient one, which would cost $1,800 and require $250 annually in operating costs except depreciation. After-tax salvage value of the old machine is $600, while its annual operating costs except depreciation are $1,100. Assume that, regardless of the age of the equipment, Cold Duck Manufacturing Inc.'s sales revenues are fixed at $3,500 and depreciation on the old machine is $600. Assume also that the tax rate is 40% and the project's risk-adjusted cost of capital, r, is the same as weighted average cost of capital (WACC) and equals 10% Based on the data, net cash flows (NCFs) before replacement are , and they are constant over four years Although Cold Duck Manufacturing Inc.'s NCFS before replacement are the same over the four-year period, its NCFS after replacement vary annually. The following table shows depreciation rates over four years. Year 1 Year 2 Year 3 Year 4 Depreciation rates 33.33% 44.45% 14.81% 7.41% Complete the following table and calculate incremental cash flows in each year. Hint: Round your answers to the nearest dollar and remember to enter a minus sign if the calculated value is negative. Year 0 Year 2 Year 1 Year 3 Year 4 New machine cost $1,800 $600 After-tax salvage value, old machine $3,500 $3,500 Sales revenues $3,500 $3,500 Operating costs except depreciation $250 $250 $250 $250 $ $ Operating income After-tax operating income $ $ $ $ Net cash flows after replacement $ $ $ $ (adding back depreciation) Incremental Cash Flows $ $ Cold Duck Manufacturing Inc. is a company that produces iGadgets, among several other products. Suppose that Cold Duck Manufacturing Inc. considers replacing its old machine used to make iGadgets with a more efficient one, which would cost $1,800 and require $250 annually in operating costs except depreciation. After-tax salvage value of the old machine is $600, while its annual operating costs except depreciation are $1,100. Assume that, regardless of the age of the equipment, Cold Duck Manufacturing Inc.'s sales revenues are fixed at $3,500 and depreciation on the old machine is $600. Assume also that the tax rate is 40% and the project's risk-adjusted cost of capital, r, is the same as weighted average cost of capital (WACC) and equals 10% Based on the data, net cash flows (NCFs) before replacement are , and they are constant over four years Although Cold Duck Manufacturing Inc.'s NCFS before replacement are the same over the four-year period, its NCFS after replacement vary annually. The following table shows depreciation rates over four years. Year 1 Year 2 Year 3 Year 4 Depreciation rates 33.33% 44.45% 14.81% 7.41% Complete the following table and calculate incremental cash flows in each year. Hint: Round your answers to the nearest dollar and remember to enter a minus sign if the calculated value is negative. Year 0 Year 2 Year 1 Year 3 Year 4 New machine cost $1,800 $600 After-tax salvage value, old machine $3,500 $3,500 Sales revenues $3,500 $3,500 Operating costs except depreciation $250 $250 $250 $250 $ $ Operating income After-tax operating income $ $ $ $ Net cash flows after replacement $ $ $ $ (adding back depreciation) Incremental Cash Flows $ $
