Question
Mars Inc. is considering replacing an old machine.The machine purchased 2 years ago, is being depreciated on a straight-line basis and has four years of
Mars Inc. is considering replacing an old machine.The machine purchased 2 years ago, is being depreciated on a straight-line basis and has four years of remaining life.Its current book value is $2,400, and it can be sold for $6,000 at this time.Thus, the annual depreciation expense is $2,400/4 = $600 per year.If the old machine is not replaced, it can be sold for $500 at the end of its useful life.Mars is considering the purchase of a new machine which costs $30,000 and has an estimated useful life of 4 years with an estimated salvage value of $900.The machine falls into the MACRS 3-year class (33%, 45%, 15%, 7%).The machine will reduce manufacturing costs by $9,000 annually.The machine would require an increase in net working capital by $3,000 when the machine is installed, but required working capital will return to the original level when the machine is sold after 4 years. Mars's marginal tax rate is 40 percent, and it uses a 15 percent cost of capital to evaluate projects of this nature. What is the initial cash flow (NCF0) of the replacement project?
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