Question
(Estimated time allowance: 40-50 minutes) Easy-Chair Corp. is considering replacing its existing equipment that is used to produce comfort recline chairs. This existing equipment was
(Estimated time allowance: 40-50 minutes) Easy-Chair Corp. is considering replacing its existing equipment that is used to produce comfort recline chairs. This existing equipment was purchase 2 years ago at a base price of $100,000. Installation costs at the time for this old equipment were $5,000. The existing equipment is considered a 5-year class for MACRS. The existing equipment can be sold today for $40,000 and for $0 in 3 years. The new equipment has a purchase price of $200,000 and is also considered a 5-year class for MACRS. Installation costs for the new equipment are $10,000. It is estimated that this equipment can be sold in 3 years (end of project) for $70,000. This new equipment is more efficient than the existing one and thus savings before taxes using the new machine are $20,000 a year. This new equipment will also require additional working capital today of $12,000; this investment will be recovered at the end of the project in year 3. The company's marginal tax rate is 20% and the cost of capital is 10%.
What is the NPV of this replacement project? The following 6 questions reach the value for the answer.
MACRS Fixed Annual Expense Percentages by Recovery Class | |||||
Year | 3-Year | 5-Year | 7-Year | 10-Year | 15-Year |
1 | 33.33% | 20.00% | 14.29% | 10.00% | 5.00% |
2 | 44.45% | 32.00% | 24.49% | 18.00% | 9.50% |
3 | 14.81% | 19.20% | 17.49% | 14.40% | 8.55% |
4 | 7.41% | 11.52% | 12.49% | 11.52% | 7.70% |
5 | 11.52% | 8.93% | 9.22% | 6.93% | |
6 | 5.76% | 8.93% | 7.37% | 6.23% | |
7 | 8.93% | 6.55% | 5.90% | ||
8 | 4.45% | 6.55% | 5.90% | ||
9 | 6.56% | 5.91% | |||
10 | 6.55% | 5.90% | |||
11 | 3.28% | 5.91% | |||
12 | 5.90% | ||||
13 | 5.91% | ||||
14 | 5.90% | ||||
15 | 5.91% | ||||
16 |
|
|
|
| 2.95% |
For your answer, round to the nearest dollar, do not enter the $ sign, use commas to separate thousands, use a negative sign in front of first number is the cash flow is negative (do not use parenthesis to indicate negative cash flows). For example, if your answer is $3,005.87 then enter 3,006; if your answer is -$1,200.25 then enter -1,200
1. What is the initial outlay (I0) for this project - the project cash flows at time = 0?
2. What is the free cash flow (FCF) for year 1 of this replacement project?
3. What is the free cash flow (FCF) for year 2 of this replacement project?
4. What is the net operating profit plus incremental depreciation for year 3 of this replacement project?
5. What is the free cash flow (FCF) for year 3 of this replacement project?
6. What is the NPV of this replacement project?
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