Question
Relevant cash flows No terminal value Central Laundry and Cleaners is considering replacing an existing piece of machinery with a more sophisticated machine. The old
Relevant cash flows No 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 $48,200,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 $75,100 and requires $3,500 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 $54,900 without incurring any removal or cleanup costs. The firm is subject to a tax rate of 40%. The revenues and expenses (excluding depreciation and interest) associated with the new and the old machines for the next 5 years are.
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 | $ |
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