Questions: 1. (65 points) The Zhang Equipment Company's machine was purchased 5 years ago for $55,000. It had an expected life of 10 years when it was bought, and its remaining depreciation is $5,500 per year for each year of its remaining life. As older machine are robust and useful machine, this one can be sold for $20,000 at the end of its useful life. A new high-efficiency, digital-controlled machine can be purchased for $120,000, including installation costs. During its 5-year life, it will reduce cash operating expenses by $30,000 per year. Sales revenue will not be affected. At the end of its useful life, the high- efficiency machine is estimated to be sold at $10,000. MACRS depreciation will be used, and the machine will be depreciated over its 5-year property class life. The old machine can be sold today for $35,000. The firm's tax rate is 25%, and the appropriate cost of capital is 13%. a) If the new machine is purchased, what is the amount of the initial cash flow at Year 0? b) What is the after-tax salvage value of the new machine at the end of the project? c) What are the incremental cash flows that will occur at the end of Years 1 through 5? d) What is the NPV, IRR, MIRR, payback period, discounted payback period of the project? e) Perform sensitivity analysis for WACC, cost saving, and salvage value of the new machine with their values change at increasing and decreasing of 10%, 20% and 30%. Which variable is more dangerous? Please explain through graph. Datatable is required to get credit for this problem. f) Perform scenario analysis as follows: Scenario Probability Cost Savings WACC Salvage Value (New) Worst case 25% 20,000 8,000 Base case 50% 30,000 10,000 Best case 25% 40,000 11% 12,000 What are the NPV, IRR, MIRR, payback period and discounted payback period for each scenario? It is required to establish scenarios by using scenario manager to get credits for this problem. 16% 13% Questions: 1. (65 points) The Zhang Equipment Company's machine was purchased 5 years ago for $55,000. It had an expected life of 10 years when it was bought, and its remaining depreciation is $5,500 per year for each year of its remaining life. As older machine are robust and useful machine, this one can be sold for $20,000 at the end of its useful life. A new high-efficiency, digital-controlled machine can be purchased for $120,000, including installation costs. During its 5-year life, it will reduce cash operating expenses by $30,000 per year. Sales revenue will not be affected. At the end of its useful life, the high- efficiency machine is estimated to be sold at $10,000. MACRS depreciation will be used, and the machine will be depreciated over its 5-year property class life. The old machine can be sold today for $35,000. The firm's tax rate is 25%, and the appropriate cost of capital is 13%. a) If the new machine is purchased, what is the amount of the initial cash flow at Year 0? b) What is the after-tax salvage value of the new machine at the end of the project? c) What are the incremental cash flows that will occur at the end of Years 1 through 5? d) What is the NPV, IRR, MIRR, payback period, discounted payback period of the project? e) Perform sensitivity analysis for WACC, cost saving, and salvage value of the new machine with their values change at increasing and decreasing of 10%, 20% and 30%. Which variable is more dangerous? Please explain through graph. Datatable is required to get credit for this problem. f) Perform scenario analysis as follows: Scenario Probability Cost Savings WACC Salvage Value (New) Worst case 25% 20,000 8,000 Base case 50% 30,000 10,000 Best case 25% 40,000 11% 12,000 What are the NPV, IRR, MIRR, payback period and discounted payback period for each scenario? It is required to establish scenarios by using scenario manager to get credits for this problem. 16% 13%
