DRAW TIMELINE

Replacement Project Problem #4 Draw the time line and fill in all labels and cash flow amounts (as done in class). Newsom Corporation is evaluating whether to replace one of its machines. The current machine was purchased 2 years ago for $12,000 and falls into the MACRS 3-year class. It has 1 year of remaining life and a $2,600 salvage value one year from now. The current market value of the older machine is $4,200. Alternatively, the company could purchase a new machine for $15,000. Delivery of the new machine would cost $800 and installation would cost $200. The new machine is expected to increase inventory needs by $900, and accounts payable is expected to increase by $500. The new machine falls in the MACRS 3-year class, has a 1-year economic life and a salvage value at the end of 1 year of $10,600. It is expected to increase revenue by $4,000 per year, and is expected to decrease costs by $3,000 per year. The firm has a 25% tax rate and a cost of capital of 9%. The MACRS 3-year class uses the following percentages: 33%, 45%, 15%, and 7%. Round all CFs to the nearest dollar. (10 pts. each answer put the correct sign!) Calculate the overall NPV. Answer: $1,162 Check figures: CF. = $12,590 CF= $14,990 Replacement Project Problem #4 Draw the time line and fill in all labels and cash flow amounts (as done in class). Newsom Corporation is evaluating whether to replace one of its machines. The current machine was purchased 2 years ago for $12,000 and falls into the MACRS 3-year class. It has 1 year of remaining life and a $2,600 salvage value one year from now. The current market value of the older machine is $4,200. Alternatively, the company could purchase a new machine for $15,000. Delivery of the new machine would cost $800 and installation would cost $200. The new machine is expected to increase inventory needs by $900, and accounts payable is expected to increase by $500. The new machine falls in the MACRS 3-year class, has a 1-year economic life and a salvage value at the end of 1 year of $10,600. It is expected to increase revenue by $4,000 per year, and is expected to decrease costs by $3,000 per year. The firm has a 25% tax rate and a cost of capital of 9%. The MACRS 3-year class uses the following percentages: 33%, 45%, 15%, and 7%. Round all CFs to the nearest dollar. (10 pts. each answer put the correct sign!) Calculate the overall NPV. Answer: $1,162 Check figures: CF. = $12,590 CF= $14,990