? Green Zebra Grocery (GZ) is considering replacing its current kitchen equipment with a technology that will allow for greater flexibility in producing grab and go food and, at the same time, greater cost efficiency. The existing machinery is in good operating condition but company analysts have estimated that buying the new equipment with flexible cooking & storage patterns would allow them to better meet the needs of all of its stakeholders. The old equipment has a current book value of $260million with a remaining life of four years. 3 The company has been using straight-line depreciation to depreciate this asset towards a zero salvage value for tax purposes. However, based upon current estimates, company experts are estimating a $65 million salvage value at the end of the assets' useful life (at T4). If sold today, the company would receive $75 million. 0 1 The new kitchen equipment will cost $350 million and will be depreciated as a 3 year MACRS asset even though it is expected to have a four year economic life. Although increased 2 3 efficiencies are expected to occur, the additional sales of $115 million per year will require a slight increase in operating expenses of $17 million per year. GZ estimates that working 4 5 capital will increase by $23m with the adoption of the new machine. To prepare the site for installation, an investment of $27m will be required. This installation cost will be added 6 7 to the equipment cost and depreciated. Full recovery of working capital is expected in four years, and the company estimates they can sell the equipment at that time for $85 million. 8 GZ's marginal tax rate is 25 percent and this project requires a discount rate of 8%. 9 0 Outline what you know by placing the name of an input in one column and the amount in the adjacent, 1 column, as shown by the example inputs below. 2 Cost of New Store Equipment $485 Tax rate 3 25% 4 Years 2 3 4 33.0% 45.0% $160,050,000 $218,250,000 $324,950,000 $106,700,000 15.0% $72,750,000 $33,950,000 7.0% $33,950,000 $0 NEW Equipment OLD Equipment Net T4 Salvage Values (OLD) 30 31 Calculate BV, Depreciation and Amortization Schedule 32 0 33 New Equipment 485,000,000 34 Equipment Deprn Rate 35 Equipment Deprn, Dollars 36 Ending Book Value 37 38 39 40 41 Net T4 Salvage Values (NEW) 42 43 44 45 46 Net cash flow from salvage, NEW 47 48 Net change in expected salvage value, after tax (new - old) 49 50 Projected Net Cash Flows (Time line of annual cash flows) 51 Year 52 Investment Outlays at Time Zero: 53 54 55 56 57 Total Outlay @ To: 58 59 Operating Cash Flows over the Project's Life: 60 61 62 Net cash flow from salvage, OLD 0 2 3 7 8 9 Terminal Year Cash Flows: 0 1 2 Net Pjt Cash Flows (Time line of cash flows) 3 4 Key Output: Appraisal of the Proposed Project 6 Net Present Value 7 MIRR 8 9 0 1 ? Green Zebra Grocery (GZ) is considering replacing its current kitchen equipment with a technology that will allow for greater flexibility in producing grab and go food and, at the same time, greater cost efficiency. The existing machinery is in good operating condition but company analysts have estimated that buying the new equipment with flexible cooking & storage patterns would allow them to better meet the needs of all of its stakeholders. The old equipment has a current book value of $260million with a remaining life of four years. 3 The company has been using straight-line depreciation to depreciate this asset towards a zero salvage value for tax purposes. However, based upon current estimates, company experts are estimating a $65 million salvage value at the end of the assets' useful life (at T4). If sold today, the company would receive $75 million. 0 1 The new kitchen equipment will cost $350 million and will be depreciated as a 3 year MACRS asset even though it is expected to have a four year economic life. Although increased 2 3 efficiencies are expected to occur, the additional sales of $115 million per year will require a slight increase in operating expenses of $17 million per year. GZ estimates that working 4 5 capital will increase by $23m with the adoption of the new machine. To prepare the site for installation, an investment of $27m will be required. This installation cost will be added 6 7 to the equipment cost and depreciated. Full recovery of working capital is expected in four years, and the company estimates they can sell the equipment at that time for $85 million. 8 GZ's marginal tax rate is 25 percent and this project requires a discount rate of 8%. 9 0 Outline what you know by placing the name of an input in one column and the amount in the adjacent, 1 column, as shown by the example inputs below. 2 Cost of New Store Equipment $485 Tax rate 3 25% 4 Years 2 3 4 33.0% 45.0% $160,050,000 $218,250,000 $324,950,000 $106,700,000 15.0% $72,750,000 $33,950,000 7.0% $33,950,000 $0 NEW Equipment OLD Equipment Net T4 Salvage Values (OLD) 30 31 Calculate BV, Depreciation and Amortization Schedule 32 0 33 New Equipment 485,000,000 34 Equipment Deprn Rate 35 Equipment Deprn, Dollars 36 Ending Book Value 37 38 39 40 41 Net T4 Salvage Values (NEW) 42 43 44 45 46 Net cash flow from salvage, NEW 47 48 Net change in expected salvage value, after tax (new - old) 49 50 Projected Net Cash Flows (Time line of annual cash flows) 51 Year 52 Investment Outlays at Time Zero: 53 54 55 56 57 Total Outlay @ To: 58 59 Operating Cash Flows over the Project's Life: 60 61 62 Net cash flow from salvage, OLD 0 2 3 7 8 9 Terminal Year Cash Flows: 0 1 2 Net Pjt Cash Flows (Time line of cash flows) 3 4 Key Output: Appraisal of the Proposed Project 6 Net Present Value 7 MIRR 8 9 0 1