Question 1:

Muthusamy Curry Mills (MCM) is considering the purchase of a new milling equipment to replace an existing one that has a book value of $3,000 and can be sold for $1,500. The old machine is being depreciated on a straight-line basis and its estimated salvage value 3 years from now is zero. The new machine will reduce costs (before taxes) by $7,000 per year. It has a 3-year life; with an installed cost of $14,000; and it can be sold for an expected $2,000 at the end of the third year. The new machine would be depreciated over its 3-year life using the MACRS method. The applicable depreciation rates are as follows:

Year 1: 33%

Year 2: 45%

Year 3: 15%

Year 4: 7%

Assume a 40% tax rate and a cost of capital of 16%.

Required:

1. The initial investment associated with the replacement of the old milling equipment by the new one is?
2. The incremental operating cash flows associated with the proposed replacement in Year 1 is?
3. The incremental operating cash flows associated with the proposed replacement in Year 2 is?
4. The incremental operating cash flows associated with the proposed replacement in Year 3 is?
5. The terminal cash flow is?
6. The NPV of the replacement project is?
7. The IRR of the replacement project is?
8. Should MCM replace the old milling equipment with the new one?