Problem 11-17

Olson-Jackson Corp. (OJC) is considering replacing a machine that was purchased only two years ago because of dramatic improvements in new models. The old machine has been depreciated straight-line, anticipating a 10-year life based on a cost of $240,000 and an expected salvage value of $20,000. It currently has a market value of $180,000. If the old machine is kept five more years, it would have a market value of $60,000 at the end of that time. A new machine would cost $350,000 and would be depreciated straight-line over five years to a salvage value of $45,000, at which time it would be sold at that price. Develop a cash flow projection showing the difference between keeping the old machine and acquiring the new one. Assume OJC's tax rate = 40%.(Note: A complete cash flow projection for the project would include the financial benefits of the better performance of the new machine as well as a comparison of the operating costs of the two models. In this problem, we're just focusing on the cost of the equipment.) Use a minus sign to indicate negative cash flows or decreases in cash, if required.

Initial Outlay	$
Operating CF	$
Total Cash Flow	$