The Smith Company is considering the replacement of three manually operated milling machines with one new machine, a state of the art automated model. The old machines required three operators, one for each machine. The new machine could produce the same output but with only one operator. The old machines were purchased three years ago and had an expected useful life of eight years. If the new machine is purchased, the old machines will be sold in the used equipment market. New technology becomes obsolete more quickly now and the expected useful life of the new machines is five years. The firm depreciates equipment to zero book value using the straight line methiod for tax reporting purposes. The senior management team has asked you to calculate the NPV for this project. Data is provided below.

Problem #1: Capital Budgeting Equipment Replacement 1 2 3 4. The Smith Company is considering the replacement of three manually operated milling machines with one new machine, a state of the art automated model. The old machines required three operators, one for each machine. The new machine could produce the same output but with only one operator. The old machines were purchased three years ago and had an expected useful life of eight years. If the new machine is purchased, the old machines will be sold in the used equipment market. New technology becomes obsolete more quickly now and the expected useful life of the new machines is five years. The firm depreciates equipment to zero book value using the straight line method for tax reporting purposes. The senior management team has asked you to calculate the NPV for this project Data is provided below. 5 6 7 8 Old Machines New Machine 9 acquisiton date 31-Dec-16 acquisiton date 31-Dec-19 10 acquisition cost $240,000 acquisition cost estimated residual value at end of useful life (31-Dec $540,000 11 $0 estimated residual value at end of useful life (31-Dec $60,000 12 estimated useful life (years) 8 estimated useful life years) 5 13 estimated value in seg equipment market on 31-Dec $48.000 annual wares for machine operators $75,000 ** totals 14 both new and old machines cost of capital 15 18 09 income tax rate 16 35.0% 17 18 Complete the cash flow template below. Use positive numbers for cash inflows and negative numbers for cash outlows. Similarly, use positive numbers for items that increase income and negative numbers for items that decrease income. There is a section below this template where you need to clearly show your work for income taxes on investing activities (20 points) 19 20 21 0 2 3 acquisition/disposal of new equipment 5 sale of old machines in used equipment market Labor savings 5 7 depreciation pretax income income taxes on operating activities income taxes on investing activities after tax income net cash flow NPV "You should know the definition of investing activities