Problem

Baldwin Corp. is considering replacing one of its existing machines with a new, more automated and efficient one. The old machine has a book value of $100,000. It could be sold today for $50,000. The remaining book value is being strait line depreciated to 0 salvage value, at the rate of $20,000/year. The new machine costs $400,000. If introduced, the company estimates that will save annually $60,000 on a before tax basis. This is considered a year end cash flow. The corporate tax rate is 40%; discount rate used is 15%. The new machine will be straight line depreciated on ten year life to 0 salvage value. In order to encourage the replacement of the old machine the state Environmental Protection Agency is offering a replacement subsidy. This is paid one year after the replacement. What is the minimum subsidy that will make the replacement worthwhile?

Create a realistic and error-free financial model for the problem sent in e-mail by your workshop leader. Use MS Excel for creating the necessary spreadsheets in one workbook and MS Word for the user's manual. Define clearly the different types of variables and the users of the model. For parameters, input and output variables use colour coding. Protect your model. Use easily understandable formulas, data validation and minimum hard coding. Make your model user friendly by using appropriate numbers formatting; cell comments, spinners etc. create a flexible les, scenarios and charts. Test your model. Include the model description in your user's manual. Marking criteria: error free realistic easy to use protection easily understandable formulas appropriate numbers formatting well organized and easy to follow by formatting O fonts O colours O patterns o borders cell comments data validation chart data table scenario user friendly tests user's manual O model description o underlying theories, formulas inputs and outputs assumptions o illustrations of the model o references