Question
Stroms Drive-In is considering replacing its old projector with a new one. The old projector was being depreciated using MACRS (5 year class). Original installed
Stroms Drive-In is considering replacing its old projector with a new one. The old projector was being depreciated using MACRS (5 year class). Original installed cost was $10,000 four years ago and it can now be sold for $2,000. The new projector will cost $18,000 and will be depreciated using MACRS (5 year class). Reduced expenses of $5,000 per year will result because of decreased labor cost to run the projector. The firm is in the 21% tax bracket. What is the initial capital spending (year 0) for the projector? What are the operating cash flows over five years? If the firm has a cost of capital of 12%, should the projector be replaced? The company spent $5,000 researching the replacement projector. Would this change your answer? Why?
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