Existing loader: Originally purchased 3 years ago at an installed cost of 425,000 , it is being depreciated under the MACRS 5 -year schedule. It has 5 more years of economic life. The loader can be sold now for $180,000 before taxes. If retained instead of being replaced, it can be sold at the end of 5 years (its remaining economic life) to net $110,000 before taxes. New Model X: The more advanced of the two recommended alternatives, it can be purchased for $800,000 and will require $24,000 of installation costs. The 5 -year MACRS depreciation schedule will be used. At the end of 5 years, it's estimated the machine could be sold to net $375,000 before taxes. Current account changes associated with the acquisition of this loader are listed in the table below. Dr. Aaron DeSpain St. Petersburg College Not for distribution or posting outside of this course. New Model Z: Purchase cost is $650,000 and installation costs are $22,000. The same 5-year MACRS depreciation schedule will be used. At the end of 5 years, the molder can be sold to net $200,000 before taxes. No effect on the firm's current accounts is expected. Estimated earnings before depreciation and taxes for each of the three loaders (Existing, X and Z ) over the next 5 years is shown in the table below. DCI is subject to a corporate tax rate of 21% and cost of capital of 7% Instructions: Use this template to complete the case questions. Leverage the Helpful Hints in the second sheet of this workbook. See the color key to the right for additional input instructions. Question 1/O paini Cost of Capital Taz Rate sting Loader Original Installed C /bpoins / ash flow in gear 5) Note: Remember that "Relevant Cash Flows" are the Incremental Cash Flows in Capital Budgeting Analyses. \begin{tabular}{|l|l|l|} \hline ative Cash Flows for Panback \\ \hline Year & ModelX & ModelZ \\ \hline 1 & 0 & 0 \\ 2 & 0 & 0 \\ 3 & & \\ 4 & & \\ 5 & & \\ \hline \end{tabular} Note: Saberact eerand cast hom tor year 5 \begin{tabular}{l} Pagback Period \\ Model X: # whole yesrs + part of next yesr to recoup the initisl investment. \\ Model Z: # whols yesrs + part of next yesr to recoup the initial inwestment. \\ \hline \end{tabular} Note: Remember that "Relevant Cash Flows" are the Incremental Cash Flows in Capital Budgeting Analyses. Explain: Capital rationing: Ruestion 6/ Dpuins / \begin{tabular}{|l|} \hline \multicolumn{1}{|c|}{ Model X } \\ \hline Risk-Free Rate \\ Market Rate \\ Beta | \\ Cost of Capital \\ Model X MPY \\ \hline \end{tabular} 157 158 Ruestion 6 /Oponins / \begin{tabular}{|l|} \hline \multicolumn{1}{|c|}{ Model X } \\ \hline Risk-Free Rate \\ Market Rate \\ Beta | \\ Cost of Capital \\ Model X WPY \\ \hline \end{tabular} Explain: 175 Existing loader: Originally purchased 3 years ago at an installed cost of 425,000 , it is being depreciated under the MACRS 5 -year schedule. It has 5 more years of economic life. The loader can be sold now for $180,000 before taxes. If retained instead of being replaced, it can be sold at the end of 5 years (its remaining economic life) to net $110,000 before taxes. New Model X: The more advanced of the two recommended alternatives, it can be purchased for $800,000 and will require $24,000 of installation costs. The 5 -year MACRS depreciation schedule will be used. At the end of 5 years, it's estimated the machine could be sold to net $375,000 before taxes. Current account changes associated with the acquisition of this loader are listed in the table below. Dr. Aaron DeSpain St. Petersburg College Not for distribution or posting outside of this course. New Model Z: Purchase cost is $650,000 and installation costs are $22,000. The same 5-year MACRS depreciation schedule will be used. At the end of 5 years, the molder can be sold to net $200,000 before taxes. No effect on the firm's current accounts is expected. Estimated earnings before depreciation and taxes for each of the three loaders (Existing, X and Z ) over the next 5 years is shown in the table below. DCI is subject to a corporate tax rate of 21% and cost of capital of 7% Instructions: Use this template to complete the case questions. Leverage the Helpful Hints in the second sheet of this workbook. See the color key to the right for additional input instructions. Question 1/O paini Cost of Capital Taz Rate sting Loader Original Installed C /bpoins / ash flow in gear 5) Note: Remember that "Relevant Cash Flows" are the Incremental Cash Flows in Capital Budgeting Analyses. \begin{tabular}{|l|l|l|} \hline ative Cash Flows for Panback \\ \hline Year & ModelX & ModelZ \\ \hline 1 & 0 & 0 \\ 2 & 0 & 0 \\ 3 & & \\ 4 & & \\ 5 & & \\ \hline \end{tabular} Note: Saberact eerand cast hom tor year 5 \begin{tabular}{l} Pagback Period \\ Model X: # whole yesrs + part of next yesr to recoup the initisl investment. \\ Model Z: # whols yesrs + part of next yesr to recoup the initial inwestment. \\ \hline \end{tabular} Note: Remember that "Relevant Cash Flows" are the Incremental Cash Flows in Capital Budgeting Analyses. Explain: Capital rationing: Ruestion 6/ Dpuins / \begin{tabular}{|l|} \hline \multicolumn{1}{|c|}{ Model X } \\ \hline Risk-Free Rate \\ Market Rate \\ Beta | \\ Cost of Capital \\ Model X MPY \\ \hline \end{tabular} 157 158 Ruestion 6 /Oponins / \begin{tabular}{|l|} \hline \multicolumn{1}{|c|}{ Model X } \\ \hline Risk-Free Rate \\ Market Rate \\ Beta | \\ Cost of Capital \\ Model X WPY \\ \hline \end{tabular} Explain: 175
