DRAW TIMELINE
Replacement Project Problem #3 Kolar, Brunt & Associates is evaluating whether to replace on of its machines. The current machine was purchased 2 years ago for $12,000 and falls into the MACRS 7-year class. It has 3 years of remaining life and a $2,000 salvage value 3 years from now. The current market value of the older machine is $4,000. Alternatively, the company could purchase a new machine for $17,000. Delivery of the new machine would cost $200 and installation would cost $400. The new machine is expected to increase inventory needs by $600, and accounts payable is expected to increase by $400. The new machine falls into the MACRS 7-year class, has a 3 year economic life and a salvage value at the end of year 3 of $13,000. It is expected to decrease revenues by $1,000 per year, and decrease costs by $3,000 per year. The firm has a 40% tax rate and a cost of capital of 9%. The MACRS 7-year class uses the following percentages: 14%, 259 7%, 139 9%, 9%, 9%, 4%. Round all CF's to the nearest dollar. (10 pts. each answer If the answer is an outflow on the cash flow line, put it as a negative in the blank provided. If the answer is an inflow on the cash flow line, put it as a positive in the blank provided.) a toimitron 1. 2. 3. 4. 5. 6. 7. Calculate the depreciable basis for the new machine. Answer: (17,600) Calculate the change in NWC at t=0. Answer: (200) Calculate the tax effect from selling the old machine at t=0. Answer: +1,328 Calculate OCF1. Answer: +1,370 Calculate the tax effect from selling the new machine at t-n. Answer: (2,102) Calculate the overall NPV. Answer: (903.97) What does that tell you? Be specific! Replacement Project Problem #3 Kolar, Brunt & Associates is evaluating whether to replace on of its machines. The current machine was purchased 2 years ago for $12,000 and falls into the MACRS 7-year class. It has 3 years of remaining life and a $2,000 salvage value 3 years from now. The current market value of the older machine is $4,000. Alternatively, the company could purchase a new machine for $17,000. Delivery of the new machine would cost $200 and installation would cost $400. The new machine is expected to increase inventory needs by $600, and accounts payable is expected to increase by $400. The new machine falls into the MACRS 7-year class, has a 3 year economic life and a salvage value at the end of year 3 of $13,000. It is expected to decrease revenues by $1,000 per year, and decrease costs by $3,000 per year. The firm has a 40% tax rate and a cost of capital of 9%. The MACRS 7-year class uses the following percentages: 14%, 259 7%, 139 9%, 9%, 9%, 4%. Round all CF's to the nearest dollar. (10 pts. each answer If the answer is an outflow on the cash flow line, put it as a negative in the blank provided. If the answer is an inflow on the cash flow line, put it as a positive in the blank provided.) a toimitron 1. 2. 3. 4. 5. 6. 7. Calculate the depreciable basis for the new machine. Answer: (17,600) Calculate the change in NWC at t=0. Answer: (200) Calculate the tax effect from selling the old machine at t=0. Answer: +1,328 Calculate OCF1. Answer: +1,370 Calculate the tax effect from selling the new machine at t-n. Answer: (2,102) Calculate the overall NPV. Answer: (903.97) What does that tell you? Be specific
