Williamston Widgets Inc. wishes to determine whether it would be advisable to replace an existing, fully depreciated machine with a new piece of equipment. Assume a project time frame of 5 years.

• The new machine will cost $500,000. It will be depreciated (straight line) over a five-year period, assuming a salvage value of $50,000.
• The old machine, which has been fully depreciated, could be sold today at $100,000.

• Sales in Year 1 are projected to be $260,000. The new machine will produce superior products, causing sales to grow by 10% per year.

• Total expenses have been estimated at 61.5% of Sales.

• The firm is in the 31% marginal tax bracket and requires a minimum return on the replacement decision of 10%.

• Even though they will be depreciating the new machine to $50,000 over the course of the project, a representative from Stockbridge Sprockets has told WWI that they will likely buy the machine from them at the end of the project for $200,000. WWI has decided to include this in the terminal value of the project.

• The project will require $82,000 in Net Working Capital, none of which will be recovered at the end of the project.

Part A: Base case project decision (40 points)

• On the Assignment spreadsheet, on the part A tab, add the value drivers.
• Build the DCF Model, and calculate NPV and IRR
• Somewhere on this tab, state whether or not the company should purchase the new machine

• 

2 VALUE DRIVERS 3 Sales Growth 4 Expenses as % of sales 5 Cost of new machine 6 Salvage value 7 Old machineresale 8 New machine resale 9 Tax rate 10 Required Rate of Return 11 Project Time Period 12 13 14 15 16 Initial Investment (lI) 17 18 OCF: 19 Revenues 20 Expenses 21 Depreciation 10.0% 61.5% $500,000 $50,000 $100,000 $200,000 31.00% 10.00% Years $500,000 $50,000