Mid Michigan Manufacturing Inc (MMMI) wishes to determine whether it would be advisable to replace an existing production machine with a new one The have hired your firm as a consultant to determine whether the new machine should be purchased The data you will need to make this determination is as follows MMMI has decided to set a project timeline of 4 years The new machine will cost $1,100,000 It will be depreciated (straight line) over a five year period (its estimated useful life), assuming a salvage value of $100,000 The old machine, which has been fully depreciated, could be sold today for $253,165 The company has received a firm offer for the machine from Williamston Widgets, and will sell it only if they purchase the new machine Additional Sales generated by the superior products made by the new machine would be $665,000 in Year 1 In Years 2 3 sales are projected to grow by 8 5 per year However, in Year 4, sales are expected to decline by 5 as the market starts to become saturated Total expenses have been estimated at 60 75 of Sales The firm is in the 21 marginal tax bracket and requires a minimum return on the replacement decision of 9 A representative from Stockbridge Sprockets has told MMMI that they will buy the machine from them at the end of the project (the end of Year 4) for $100,000 MMMI has decided to include this in the terminal value of the project The project will require $100,000 in Net Working Capital, 54 of which will be recovered at the end of the project 1 Calculate the Operating Cash Flow per year and NPV Would you recommend going through with this investment (Note that the company has estimated that the base case has a 50 chance of being correct)

The Answer is in the image, click to view ...

Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on Sep 03, 2024

Mid-Michigan Manufacturing Inc. (MMMI) wishes to determine whether it would be advisable to replace an existing production machine with a new one. The have hired

Mid-Michigan Manufacturing Inc. (MMMI) wishes to determine whether it would be advisable to replace an existing production machine with a new one. The have hired your firm as a consultant to determine whether the new machine should be purchased. The data you will need to make this determination is as follows:

MMMI has decided to set a project timeline of 4 years.
The new machine will cost $1,100,000. It will be depreciated (straight line) over a five-year period (its estimated useful life), assuming a salvage value of $100,000.
The old machine, which has been fully depreciated, could be sold today for $253,165. The company has received a firm offer for the machine from Williamston Widgets, and will sell it only if they purchase the new machine.
Additional Sales generated by the superior products made by the new machine would be $665,000 in Year 1. In Years 2 & 3 sales are projected to grow by 8.5% per year. However, in Year 4, sales are expected to decline by 5% as the market starts to become saturated.
Total expenses have been estimated at 60.75% of Sales.
The firm is in the 21% marginal tax bracket and requires a minimum return on the replacement decision of 9%.
A representative from Stockbridge Sprockets has told MMMI that they will buy the machine from them at the end of the project (the end of Year 4) for $100,000. MMMI has decided to include this in the terminal value of the project.
The project will require $100,000 in Net Working Capital, 54% of which will be recovered at the end of the project.

1. Calculate the Operating Cash Flow per year and NPV. Would you recommend going through with this investment? (Note that the company has estimated that the base case has a 50% chance of being correct).