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The Company is considering replacement of a custard injecting machine that will be more efcient. The existing injection machine was purchased 3 years ago for
The Company is considering replacement of a custard injecting machine that will be more efcient. The existing injection machine was purchased 3 years ago for $3.93 million. It could be sold today for $1.5 million and its expected salvage value in 2 years is $0.45 million. The injector is in Class 43 with a 30% depreciation rate. The new custard injector costs $3.06 million. The new machine will be sold for $1.44 million at the end of 2 years. The new machine will increase revenues by $700,000 per year but operating expenses will stay the same. The Company's tax rate is 40% and its cost of capital is 10%. The new machine will not affect working capital. Assume that the replacement occurs immediately and that the operating cash flows occur at the end of each of the next two years. 13. What is the incremental initial cash ow for the replacement project? A) -$3,060,000 B) $2, 100,000 0) -$1,560,000 D) $3, 160,000 E) -$2,610,000 14. What is the (incremental) depreciation expense for the project in Year 2? A) $ 184,000 E) $ 150,000 C) $327,600 D) $234,000 E) $397,800
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