Question
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
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