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Relevant cash

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terminal valueCentral 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

$ 52 comma 700$52,700,

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 comma 400$75,400

and requires

$ 3 comma 700$3,700

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 comma 900$54,900

without incurring any removal or cleanup costs. The firm is subject to a tax rate of

40 %40%.

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 investment associated with replacement of the old machine by the new one.

b. Determine the incremental operating cash inflows associated with the proposed replacement. (Note: Be sure to consider the depreciation in year 6.)

c. Depict on a time line the relevant cash flows found in parts

(a)

and

(b)

associated with the proposed replacement decision.

a. Calculate the initial investment associated with replacement of the old machine by the new one.

Calculate the initial investment 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 investment			$

Rounded Depreciation Percentages by Recovery Year Using MACRS for First Four Property Classes
	Percentage by recovery year*
Recovery year	3 years	5 years	7 years	10 years
1	3333%	2020%	1414%	1010%
2	4545%	3232%	2525%	1818%
3	1515%	1919%	1818%	1414%
4	77%	1212%	1212%	1212%
5		1212%	99%	99%
6		55%	99%	88%
7			99%	77%
8			44%	66%
9				66%
10				66%
11				44%
Totals	100100%	100100%	100100%	100100%
*These percentages have been rounded to the nearest whole percent to simplify calculations while retaining realism. To calculate the actual depreciation for tax purposes, be sure to apply the actual unrounded percentages or directly apply double-declining balance (200%) depreciation using the half-year
								New machine			Old machine
								Year	Revenue	Expenses (excluding depreciation and interest)		Revenue	Expenses (excluding depreciation and interest)
								1	$ 750 comma 700$750,700	$ 720 comma 100$720,100		$ 673 comma 200$673,200	$ 659 comma 900$659,900
								2	750 comma 700750,700	720 comma 100720,100		675 comma 200675,200	659 comma 900659,900
								3	750 comma 700750,700	720 comma 100720,100		679 comma 200679,200	659 comma 900659,900
								4	750 comma 700750,700	720 comma 100720,100		677 comma 200677,200	659 comma 900659,900
								5	750 comma 700750,700	720 comma 100720,100		673 comma 200673,200	659 comma 900