Question
X Corporation invested $100 to buy an equipment 5 years ago. At the time of purchase, the equipment had an expected life of 10 years.
X Corporation invested $100 to buy an equipment 5 years ago. At the time of purchase, the equipment had an expected life of 10 years. If the equipment is not replaced, the company can sell it for $10 at the end of its expected life. However, if it is replaced, the old equipment can be sold today for $40. Assume straight-line depreciation. A new equipment can be bought for $140, including installation costs. During its 5-year useful life, it will reduce operating expenses by $50 per year. Revenues are not expected to change. At the end of its useful life, the equipment is estimated to be worthless. MACRS depreciation will be used. The equipment will be depreciated over its 3-year class life, rather than its 5-year economic life. Therefore, the applicable depreciation rates are 33%, 45%, 15%, and 7%. The firms tax rate is 30%. What is the initial investment (cash flow at Year 0)? And, what are the incremental net operating cash flows that will occur at the end of Years 1 through 5?
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