Question
Edward's Manufactured Homes is considering replacing some machines. Edwards purchased the current machinery 2 years ago for $320. The company is considering replacing this machinery
Edward's Manufactured Homes is considering replacing some machines. Edward’s purchased the current machinery 2 years ago for $320. The company is considering replacing this machinery today with newer machines that utilize the latest in technology. The new machines will cost $400, plus an additional $15 for installation. We will shut down production in 4 years. The old machines can be sold for $140 to a foreign firm for use in its production facility in South America. Both machines are classified as 5-year properties for MACRS. The old machines will have an expected salvage value of $0 in four years.
Annual sales, due to the new machine’s increased production, will increase from $1500 to $1520. The new machines are more efficient and should lower net annual variable operating costs by $35. Annual Fixed costs will remain the same at $700. Over the past two years, Edward’s has spent $13 testing the various available machines. In 4 years, we estimate the value of the new machines to be $125. We currently have $75 in working capital invested in the project, which is not expected to change if we buy the new machine. The firm’s tax rate is 35%. The cost of capital is 12%.
a. What are the initial (year 0) cash flows?
b. What are the operating cash flows in year 2?
c. What are the terminal cash flows in year 4?
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