Question
Holliday Manufacturing is considering the replacement of an existing machine. The new machine costs $1.21 million and requires installation costs of $148,000. The existing machine
Holliday Manufacturing is considering the replacement of an existing machine. The new machine costs $1.21 million and requires installation costs of $148,000. The existing machine can be sold currently for $175,000 before taxes. It is 2 yearsold, cost $801,000 new, and a remaining useful life of 5 years. It was being depreciated under MACRS using a5-year recovery period, and therefore has the final 4 years of depreciation remaining. If it is held for 5 moreyears, themachine's market value at the end of year 5 will be $0. Over its5-year life, the new machine should reduce operating costs by $343,000 per year. The new machine will be depreciated under MACRS using a5-year recovery period. The new machine can be sold for $194,000 net of removal and cleanup costs at the end of 5 years. An increased investment in net working capital of $25,000 will be needed to support operations if the new machine is acquired. Assume that the firm has adequate operating income against which to deduct any loss experienced on the sale of the existing machine. The firm has a 9.4% cost of capital and is subject to a 40% tax rate.
a. Develop the net cash flows needed to analyze the proposed replacement.
b. Determine the net present value(NPV) of the proposal.
c. Determine the internal rate of return(IRR) of the proposal.
d. Make a recommendation to accept or reject the replacementproposal.
e. What is the highest cost of capital that the firm could have and still accept theproposal?
a. Calculate the initial investment: (Round to the nearest dollar.)
Cost of the new machine: $_______
Installation cost: $_______
Installed cost of new asset: $_______
Proceeds from sale of existing machine: $______
Tax on sale of existing machine: $______
Total after-tax proceeds from sale: $____________
Increase in net working capital: $________
Initial investment: $__________
Calculate the operating cash flows from the existing machine: (Round to the nearest dollar.)
Operating cash inflows, Year 1: $___________
Operating cash inflows, Year 2: $_________
Operating cash inflows, Year 3: $__________
Operating cash inflows, Year 4: $__________
Operating cash inflows, Year 5: $__________
Operating cash inflows, Year 6: $_________
Calculate the operating cash flows from the new machine: (Round to the nearest dollar.)
Operating cash inflows, Year 1: $__________
Operating cash inflows, Year 2: $_________
Operating cash inflows, Year 3: $________
Operating cash inflows, Year 4: $_________
Operating cash inflows, Year 5: $ __________
Operating cash inflows, Year 6: $__________
Calculate the Incremental Cash Flows: (Round to the nearest dollar.)
Year 1: $________
Year 2: $________
Year 3: $_________
Year 4: $_________
Year 5: $_________
Year 6: $_________
Calculate the terminal cash flow: (Round to the nearest dollar.)
Proceeds from sale of new asset $_________
Tax on sale of new asset $___________
Total proceeds-sale of new asset $_________
Change in net working capital $__________
Terminal cash flow $________________.
b. The net present value is $___________ (Round to the nearest dollar.)
c. The internal rate of return is__________%. (Round to one decimal place.)
d. Make a recommendation to accept or reject the replacement proposal; 1 for Accept, 0 for Reject:___________
e. The highest cost of capital that the firm could have and still accept the proposal is_____________%. (Round to one decimal place.)
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