Question
Elango Crox wants to replace its existing machine that was originally purchased 2 years ago for $240,000. The machine is being depreciated using the straight-line
Elango Crox wants to replace its existing machine that was originally purchased 2 years ago for $240,000. The machine is being depreciated using the straight-line method and it has 4 years of useful life remaining. The current machine can be sold today for $140,000. The cost of the new machine is $360,000. It requires $20,000 to install and has 4-year useful life. The new machine is expected to save the firm $250,000 for the first year and $320,000 for the remaining years in before-tax operating costs. At the end of 4 years, the market value of the old machine will equal zero, but the new machine could be sold for $60,000. The new machine would require an increase in net working capital of $65,000. The firm is subject to a 40 percent tax rate.
i) Determine the initial investment associated with the proposed replacement decision?
ii) Determine the incremental operating cash flows over the useful life of the new machine
iii) Calculate the terminal cash flows associated with the proposed replacement decision
iv) If Elangos cost of capital is 11 percent, should the existing machine be replaced? Explain properly?
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