The Everly Equipment Company's flange-lipping machine was purchased 5 years ago and has been fully depreciated without any salvage value. However, it is perfectly functional as originally designed and can be used for quite a while longer. A new high-efficiency digital-controlled flange-lipper can be purchased for $120,000, including installation costs. During 5-year life (i.e., this is a 5-year project), it will reduce cash operating expenses by $300,000 per year, although it will not affect sales. At the end of its useful life, the high-efficiency machine can be sold at $5,600. MACRS depreciation will be used, and the machine will be depreciated over its 3-year class life rather its 5 year economic life. So the applicable depreciation rates are 33.33%, 44.45%, 14.81% and 7.41% The firm's tax rate is 35%, and the appropriate WACC is 16%. Please use the table in the excel file to help you conduct the replacement analysis. Note that the existing machine has no salvage value while the new machine the firm is considering purchasing has salvage value. So after-tax salvage value of the new machine = market value (i.e., the price sold in the market)- tax rate*(market value - book value). 0 1 2 3 4 5 Project Year Depreciation rates Equipment purchases Investment in WC Depreciation NOPAT WC recovered After tax SV Opportunity cost After-tax externalities Net cash flows Cost savings (i.e. Incremental Rev.) NPV The Everly Equipment Company's flange-lipping machine was purchased 5 years ago and has been fully depreciated without any salvage value. However, it is perfectly functional as originally designed and can be used for quite a while longer. A new high-efficiency digital-controlled flange-lipper can be purchased for $120,000, including installation costs. During 5-year life (i.e., this is a 5-year project), it will reduce cash operating expenses by $300,000 per year, although it will not affect sales. At the end of its useful life, the high-efficiency machine can be sold at $5,600. MACRS depreciation will be used, and the machine will be depreciated over its 3-year class life rather its 5 year economic life. So the applicable depreciation rates are 33.33%, 44.45%, 14.81% and 7.41% The firm's tax rate is 35%, and the appropriate WACC is 16%. Please use the table in the excel file to help you conduct the replacement analysis. Note that the existing machine has no salvage value while the new machine the firm is considering purchasing has salvage value. So after-tax salvage value of the new machine = market value (i.e., the price sold in the market)- tax rate*(market value - book value). 0 1 2 3 4 5 Project Year Depreciation rates Equipment purchases Investment in WC Depreciation NOPAT WC recovered After tax SV Opportunity cost After-tax externalities Net cash flows Cost savings (i.e. Incremental Rev.) NPV
