Philadelphia Fastener Corporation manufactures nails, screws, bolts, and other fasteners. Management is considering a

proposal to acquire new material$-$handling equipment. The new equipment has the same capacity as the current

equipment but will provide operating efficiencies in labor and power usage. The savings in operating costs are

estimated at $$150,000$ annually.

The new equipment will cost $$300,000$ and will be purchased at the beginning of the year when the project is started

The equipment dealer is certain that the equipment will be operational during the second quarter of the year it is

installed. Therefore, $60$ percent of the estimated annual savings can be obtained in the first year. The company will incur

a one$-$time expense of $$30,000$ to transfer production activities from the old equipment to the new equipment. No loss

of sales will occur, however, because the processing facility is large enough to install the new equipment without

interfering with the operations of the current equipment. The equipment is in the MACRS $7-$year property class. The firm

would depreciate the machinery in accordance with the MACRS depreciation schedule.

The current equipment has been fully depreciated. Management has reviewed its condition and has concluded that it

can be used an additional eight years. The company would receive $$10,000,$ net of removal costs, if it elected to buy the

new equipment and dispose of its current equipment at this time. The new equipment will have no salvage value at the

end of its life. The company is subject to a $30$ percent income$-$tax rate and requires an after$-$tax return of at least $12$

percent on any investment.

Use Appendix A and Exhibit $16-9$ for your reference.

Note: Use appropriate factor$($s$)$ from the tables provided.

Required:

Calculate the annual incremental after$-$tax cash flows for Philadelphia Fastener Corporation's proposal to acquire the

new equipment.

$2-$a$.$ Calculate the net present value of the proposal to acquire the new equipment using the cash flows calculated in

requirement $1.$ Assume all cash flows take place at the end of the year.

$2-$b$.$ Should management purchase the new equipment?

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