Question
Net cash flowsCentral Laundry and Cleaners is considering replacing an existing piece of machinery with a more sophisticated machine. The old machine was purchased 3
Net cash flowsCentral Laundry and Cleaners is considering replacing an existing piece of machinery with a more sophisticated machine. The old machine was purchased 3 years ago at a cost of
$46,100,
and this amount was being depreciated under MACRS using a 5-year recovery period. The machine has 5 years of usable life remaining. The new machine that is being considered costs
$75,000
and requires
$3,800
in installation costs. The new machine would be depreciated under MACRS using a 5-year recovery period. The firm can currently sell the old machine for
$54,500
without incurring any removal or cleanup costs. The firm is subject to a tax rate of
21%.
The revenues and expenses(excluding depreciation and interest) associated with the new and the old machines for the next 5 years aregiven in the table
LOADING...
. (Table
LOADING...
contains the applicable MACRS depreciation percentages.) Note:
The
new machine will have no terminal value at the end of 5 years.
a. Calculate the initial cash flow associated with replacement of the old machine by the new one.
b. Determine the periodic cash flows associated with the proposed replacement. (Note: Be sure to consider the depreciation in year 6.)
c. Depict on a time line the net cash flows found in parts
(a)
and
(b)
associated with the proposed replacement decision.
Question content area bottom
Part 1
a. Calculate the initial cash flow associated with replacement of the old machine by the new one.
Part 2
Calculate the initial cash flow below:(Round to the nearest dollar.)
| Cost of new asset | $ |
|
|
|
| Installation costs |
|
|
|
|
| Total cost of new asset |
|
| $ |
|
| Proceeds from sale of old asset | $ |
|
|
|
| Tax on sale of old asset |
|
|
|
|
| Total proceeds, sale of old asset |
|
| $ |
|
| Initial cash flow |
|
| $ |
|
(Click on the icon here
in order to copy the contents of the data table below into aspreadsheet.)
| New machine | Old machine | ||||
| Year | Revenue | Expenses (excluding depreciation andinterest) | Revenue | Expenses (excluding depreciation andinterest) | |
| 1 | $749,300 | $720,200 | $674,400 | $660,600 | |
| 2 | 749,300 | 720,200 | 676,400 | 660,600 | |
| 3 | 749,300 | 720,200 | 680,400 | 660,600 | |
| 4 | 749,300 | 720,200 | 678,400 | 660,600 | |
| 5 | 749,300 | 720,200 | 674,400 | ||
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