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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 machine
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 machine was purchased 3 years ago at a cost of $53,000, 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 $76,100 and requires $4,200 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 $54,800 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 given in the table EEB. (Table EEB contains the applicable MACRS depreciation percentages.) Note: 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 New machine Old machine Expenses (excluding depreciation and interest) $719,500 719,500 719,500 719,500 719,500 Expenses (excluding depreciation and interest) $659,300 659,300 659,300 659,300 659,300 Year Revenue $749,400 749,400 749,400 749,400 749,400 Revenue $673,100 675,100 679,100 677,100 673,100 4 Rounded Depreciation Percentages by Recovery Year Using MACRS for First Four Property Classes Percentage by recovery year* 10 years 5 years 20% 3"2% 1996 12% 12% 5% 7 years 14% 25% 18% 12% 9% 9% 9% 10% 18% 14% 12% 9% 5% 7% 6% 6% 6% 4% 3 years 23% 45 15% 7% Recovery year 4 10 100% 100% 100% 100% Totals
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