Intro

HipHop Inc. makes and sells trampolines. The company is considering replacing one of its manufacturing

machines with a new one. Both the new and the old machine would last another $3$ years. Annual sales will remain

constant.

The old machine was bought $3$ years ago for $$20,000.$ When it was installed, the machine had an economic and

tax life of $6$ years. It is still being linearly depreciated to zero. The machine could be sold for $$8,000$ today or

$$2,000$ in $3$ years. The annual cost of running the machine is $$27,000.$

The new machine costs $$45,000$ today and could be sold for $$9,000$ in $3$ years, when it will be decommissioned.

The machine falls into the $3-$year MACRS category, with the following depreciation rates:

The annual cost of running the machine is $$15,000.$ The new machine requires additional net working capital of

$$8,000$ that can be recouped at the end of the project.

The marginal tax rate is $34\%$ and the appropriate cost of capital for this project is $15\%.$

Part $1$

What would be the incremental cash flow from assets in year $0($right now$)$ if the firm replaced the machine?

Correct $$

Part $2$

What would be the incremental cash flow from assets in year $1$ if the firm replaced the machine?

Part $3$

What would be the incremental cash flow from assets in year $2$ if the firm replaced the machine?

Part $4$

What would be the incremental cash flow from assets in year $3$ if the firm replaced the machine?

Part $5$

What is the NPV of the replacement project?