Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Grease Gougers International is considering replacing their existing grease gouging equipment with new equipment that has a technology that will not only be less costly

Grease Gougers International is considering replacing their existing grease gouging equipment with new equipment that has a technology that will not only be less costly to operate but will gouge more grease. The original equipment was purchased 5 years ago at a cost of $240,000 and is being depreciated using 8-year straight-line depreciation to zero. The original equipment can be sold for $70,000 today. The new equipment cost is $500,000, qualifies for the 3-year MACRS depreciation class and has a 3-year useful life. The applicable MACRS rates are 33%, 45%, 15% and 7%, respectively.

The new grease gouging equipment would increase revenues $40,000 annually and would decrease operating costs (other than depreciation) by $90,000 annually. At the end of the 3-year life of this replacement analysis, the old equipment has an estimated salvage value of zero and the new equipment's salvage value is expected to be $100,000. The company's tax rate is 40% and their WACC is 16%. Also, the company expects to have enough other taxable income to write off any losses that may occur as a result of the replacement project.

What is the initial cash flow (t = 0) for Grease Gouger's replacement project? Selected

a.-$500,000

b.-$458,000

c.-$438,000

d.-$430,000

e.-$422,000

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Entrepreneurial Finance

Authors: J. Chris Leach, Ronald W. Melicher

6th edition

1305968352, 978-1337635653, 978-1305968356

More Books

Students also viewed these Finance questions

Question

11. Calculate average cash flows 11. Calculate average Cash

Answered: 1 week ago

Question

T F Franchise revenues exceed $1.5 trillion per year.

Answered: 1 week ago