Question
I am seeking a second opinion solution for the following finance problem because there is a tradein value of $105,000 for the existing machine. Should
I am seeking a second opinion solution for the following finance problem because there is a tradein value of $105,000 for the existing machine. Should that $105,000 be deducted towards the propsed newily purchased machine and would result in the initial investment for the new purchased machine less? If not, please explain.
A fitness company is considering replacing an old workout equipment with a new machine. The following information is given today: (THE FIRM PAYS 40% TAXES ON ORDINARY INCOME): The existing machine cost $150,000 with installation at 10,000 and a trade in value at $105,000 and was purchased 2 years ago with MACRS AT 5 YEARS. The proposed machine cost $180,000 with installation at $20,000. Remember to subtract the 105,000 trade in value from the existing machine towards the proposed machine. FORECASTED REVENUES FOR THE EXISTING MACHINE ARE AS FOLLOWS: YEAR 1 = $160,000, YEAR 2 = $150,000, YEAR 3 = $140,000, YEAR 4 = $140,000, YEAR 5 = $140,000. FORECASTED REVENUES FOR PROPOSED MACHINE ARE AS FOLLOWS: YEAR 1 =$175,000, YEAR 2 = $170,000, YEAR 3 = $174,000, YEAR 4 = $170,000, YEAR 5 = $173,000. FORECASTED EXPENSES WITH NO DEPRECIATION FOR THE EXISTING MACHINE ARE AS FOLLOWS: YEAR 1 = $104,000, YEAR 2 = $104,000, YEAR 3 = $104,000, YEAR 3 = $104,000, YEAR 4 = $104,000, YEAR 5 = $104,000. FORECASTED EXPENSES WITH NO DEPRECIATION FOR PROPOSED MACHINE ARE AS FOLLOWS: YEAR 1 = $110,500, YEAR 2 = $110,500, YEAR 3 = $110,500, YEAR 4 = $110,500, YEAR 5 = $110,500. USE THE FOREGOING INFORMATION TO ANSWER THE FOLLOWING QUESTIONS: A. Using the information for the existing machine and proposed machine, computer the initial investment for both. B. Use the forecast expenses to compute the incremental annual cash flows for the existing machine and the proposed machine. C. Using the information from the existing machine and the proposed machine, assume a 12.5% rate of return, what is the NPV on the proposed machine.
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