(Replacement project cash flows)The Minot Kit Aircraft Company of Minot, North Dakota, uses a plasma cutter to fabricate metal aircraft parts for its plane kits. The company currently is using a cutter that it purchased four years ago that has a book value of $70,000 and is being depreciated $17,500 per year over the next 4 years. If the old cutter were to be sold today, the company estimates that it would bring in an amount equal to the book value of the equipment.

The company is considering the purchase of a new automated plasma cutter that would cost $420,000

to install and that would be depreciated over the next 4 years toward a $39,000 salvage value using straight-line depreciation. The primary advantage of the new cutter is the fact that it is fully automated and can be run by one operator rather than the three employees that are currently required. The labor savings would be $120,000 per year. The firm faces an income tax rate of 25

percent. At the end of the 4-year project both cutters could be sold at their end-of-project book value.

a.What are the differential operating cash flow savings per year during years 1 through 4 for the new plasma cutter?

b.What is the initial cash outlay required to replace the existing plasma cutter with the newer model?

c.What does the timeline for the replacement project cash flows for years 0 through 4 look like?

d.If the company requires a discount rate of 7 percent for new investments, should the plasma cutter be replaced?

P12-31 (algorithmic) Question Help Replacement project cash The Mi r a Comory of Minot North D a ma curabic metal parts forts planes . The company current is in a cor that purchased four years ago that has a book of 70.000 and is being deprecated $17.500 per year over the years. The o ther were to be s t ay the company estimates that it would bring in an amount to the book of the met The conany is considering the purchase of that would cost 420.000 tona and th e proceder the next years toward a $39.000 sawa using strane depreciation. The y are of the new the act is automated and can be by one operatorater than the tree employees that are currently required. The labor Savings would be $120.000 per year Ther esincome of 25 percent. Al the end of the year project both er could be sold at the end of project book watu a. What are the differential operating cash flow a s per year during years through for the new plasma cuter? b. What is the cash o r rela t ing a cutter with the new model What does them for the replacement proc hows for years through look like? d. If the company requires a discount rate of percent for new investments should the plasma cutter be replaced a. The real o g cash flow savings per year during years through for the new cutter are found to the nearest de Enter your answer th a n then the Check Clear All