Question
The Darlington Equipment Company purchased a machine 5 years ago, prior to the TCJA, at a cost of $80,000. The machine had an expected life
The Darlington Equipment Company purchased a machine 5 years ago, prior to the TCJA, at a cost of $80,000. The machine had an expected life of 10 years at the time of purchase, and it is being depreciated by the straight-line method by $8,000 per year. If the machine is not replaced, it can be sold for $5,000 at the end of its useful life.
A new machine can be purchased for $170,000, including installation costs. During its 5-year life, it will reduce cash operating expenses by $55,000 per year. Sales are not expected to change. At the end of its useful life, the machine is estimated to be worthless. The new machine is eligible for 100% bonus depreciation at the time of purchase.
The old machine can be sold today for $55,000. The firm's tax rate is 25%. The appropriate WACC is 9%.
- If the new machine is purchased, what is the amount of the initial cash flow at Year 0 after bonus depreciation is considered? Cash outflow should be indicated by a minus sign. Round your answer to the nearest dollar. $
- What are the incremental cash flows that will occur at the end of Years 1 through 5? Round your answers to the nearest dollar.
Year 1 Year 2 Year 3 Year 4 Year 5 $ $ $ $ $ - What is the NPV of this project? Do not round intermediate calculations. Round your answer to the nearest cent. $ Should Darlington replace the old machine?
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