Year 1 2 3 4 5 Revenue $750,100 750,100 750, 100 750,100 750,100 New machine Expenses (excluding depreciation and interest) $719,800 719,800 719,800 719,800 719,800 Revenue $674,600 676,600 680,600 678.600 674.600 Old machine Expenses (excluding depreciation and interest) $660,400 660,400 660,400 660,400 660,400 Rounded Depreciation Percentages by Recovery Year Using MACRS for First Four Property Classes Percentage by recovery year* Recovery year 3 years 5 years 7 years 10 years 1 33% 20% 14% 10% 2 45% 32% 25% 18% 3 15% 19% 18% 14% 4 7% 12% 12% 12% 5 12% 9% 9% 6 5% 9% 8% 7 9% 7% 8 4% 6% 9 6% 10 6% 11 4% Totals 100% 100% 100% 100% *These percentages have been rounded to the nearest whole percent to simplify calculations while retaining realism. To calculate the actual depreciation for tax purposes, be sure to apply the actual unrounded percentages or directly apply double-declining balance (200%) depreciation using the half-year convention Net cash flows No terminal value Central Laundry and Cleaners is considering replacing an existing piece of machinery with a more sophisticated machine. The old machine was purchased 3 years ago at a cost of $47,900, and this amount was being depreciated under MACRS using a 5-year recovery period. The machine has 5 years of usable life remaining. The new machine that is being considered costs $75,900 and requires $3,700 in installation costs. The new machine would be depreciated under MACRS using a 5-year recovery period. The firm can currently sell the old machine for $55,900 without incurring any removal or cleanup costs. The firm is subject to a tax rate of 40%. The revenues and expenses (excluding depreciation and interest) associated with the new and the old machines for the next 5 years are given in the table (Table contains the applicable MACRS depreciation percentages.) Note: The new machine will have no terminal value at the end of 5 years. a. Calculate the initial investment associated with replacement of the old machine by the new one, b. Determine the incremental operating cash inflows associated with the proposed replacement. (Note: Be sure to consider the depreciation in year 6.) c. Depict on a time line the relevant cash flows found in parts (a) and (b) associated with the proposed replacement decision a. Calculate the initial investment associated with replacement of the old machine by the new one. Calculate the initial investment below (Round to the nearest dollar) Cost of new asset Installation costs Total cost of new asset Proceeds from sale of old asset Tax on sale of old asset Total proceeds, sale of old asset Initial investment en 0 $
