Question
SpaceX is considering replacement of a large machine. Their present machine cost $75,000 and is being depreciated using the straight-line method to a $9,000 salvage
SpaceX is considering replacement of a large machine. Their present machine cost $75,000 and is being depreciated using the straight-line method to a $9,000 salvage value, has a fifteen year life and is now five years old. It can be sold for $53,000. The new machine costs $75,000, will last 10 years and has a salvage value of $9,000. Due to the efficiency of the new machine, Net Working Capital is expected to decrease by $4,000 if the machine is replaced. With the new machine, SpaceX will be able to sell 5,000 more widgets at a price of $5 each. It costs $4 to manufacture each widget. SpaceX's discount rate is 10% and its ordinary tax rate is 40% and its capital gains tax rate is 35%.
a. What are this projects initial cash flows?
b. What are the projects annual after-tax operating cash flows?
c. Using the PI criteria, determine if the replacement should be made. Explain your answer.
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