Replacement Analysis

The Everly Equipment Company's flange$-$lipping machine was purchased $5$ years ago for $$65,000.$ It had an expected life of $10$ years when it was bought, and its remaining

depreciation is $$6,500$ per year for each year of its remaining life. As older flange$-$lippers are robust and useful machines, this one can be sold for $$20,000$ at the end of its useful

life.

A new high$-$efficiency, digital$-$controlled flange$-$lipper can be purchased for $$160,000,$ including installation costs. During its $5-$year life, it will reduce cash operating expenses by

$$25,000$ per year, although it will not affect sales. The new equipment will have zero salvage value. MACRS depreciation will be used, and the machine will be depreciated over its $3-$

year class life rather than its $5-$year economic life, so the applicable depreciation rates are $33\mathrm{.}33\%,44\mathrm{.}45\%,14\mathrm{.}81\%,$ and $7\mathrm{.}41\%($There will be no depreciation in its $5$ th year since

it will already be fully depreciated.$).$

The old machine can be sold today for $$30,000.$ The firm's tax rate is $25\%,$ and the appropriate cost of capital is $15\%.$

a$.$ If the new flange$-$lipper is purchased, what is the amount of the initial cash flow at Year $0?($Hint: you need to calculate the book value of the old machine so you can

calculate its after$-$tax salvage value.$)$ Round your answer to the nearest dollar. Cash outflow, if any, should be indicated by a minus sign.

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b$.$ What are the incremental net cash flows that will occur at the end of Years $1$ through $5?$ Hint: Be sure to also include the annual depreciation tax savings and the after$-$tax

opportunity cost of not selling the old machine at Year $5!$ Do not round intermediate calculations. Round your answers to the nearest dollar. Cash outflows, if any, should be

indicated by a minus sign.

c$.$ What is the NPV of this project? Do not round intermediate calculations. Round your answer to the nearest dollar. Negative value, if any, should be indicated by a minus

sign.

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Should Everly replace the flange$-$lipper?