Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Consider the case of Johnson Company: The managers of Johnson Company are considering replacing an existing piece of equipment, and have collected the following information:

image text in transcribed
image text in transcribed
Consider the case of Johnson Company: The managers of Johnson Company are considering replacing an existing piece of equipment, and have collected the following information: - The new piece of equipment will have a cost of $9,000,000, and it will be depreciated on a straight-line basis over a period of five years. - The old machine is also being depreciated on a straight-line basis. It has a book value of $200,000( at year 0 ) and three more years of depreciation left ($50,000 per year). - The new equipment will have a salvage value of $0 at the end of the project's life (year 5). The old machine has a current salvage value (at year 0) of $300,000. - Replacing the old machine will require an investment in net working capital (NWC) of $60,000 that will be recovered at the end of the project's life (year 5 ). - The new machine is more effidient, 50 the incremental increase in operating income before taxes will increase by a total of $300,000 in each of the next five years (years 1-5). (Hint: This value represents the difference between the revenues and operating costs (including depreciation expense) generated using the new equipment and that earned using the old equipment.) - The project's required rate of return is 11%. - The company's annual tax rate is 35%. Complete the following table and compute the incremental cash flows associated with the replacement of the old equilament with the new equipment. The net present value (NiF) af this replacement preject is Consider the case of Johnson Company: The managers of Johnson Company are considering replacing an existing piece of equipment, and have collected the following information: - The new piece of equipment will have a cost of $9,000,000, and it will be depreciated on a straight-line basis over a period of five years. - The old machine is also being depreciated on a straight-line basis. It has a book value of $200,000( at year 0 ) and three more years of depreciation left ($50,000 per year). - The new equipment will have a salvage value of $0 at the end of the project's life (year 5). The old machine has a current salvage value (at year 0) of $300,000. - Replacing the old machine will require an investment in net working capital (NWC) of $60,000 that will be recovered at the end of the project's life (year 5 ). - The new machine is more effidient, 50 the incremental increase in operating income before taxes will increase by a total of $300,000 in each of the next five years (years 1-5). (Hint: This value represents the difference between the revenues and operating costs (including depreciation expense) generated using the new equipment and that earned using the old equipment.) - The project's required rate of return is 11%. - The company's annual tax rate is 35%. Complete the following table and compute the incremental cash flows associated with the replacement of the old equilament with the new equipment. The net present value (NiF) af this replacement preject is

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Dividend Policy On Share Price Volatility In Indian Stock Market

Authors: Vijay Deswal

1st Edition

3841859623, 978-3841859624

More Books

Students also viewed these Finance questions

Question

=+What is your intention in communicating this message?

Answered: 1 week ago