Question
Your company is considering the replacement of an old machine with a new one that is more efficient. The old machine cost $50,000 when it
Your company is considering the replacement of an old machine with a new one that is more efficient. The old machine cost $50,000 when it was purchased 9 years ago. The old machine is being depreciated using the simplified straight line method over a useful life of 10 years. The old machine could be sold today for $4,000. The new machine has an invoice price of $75,000, and it will cost $5,000 for shipping and $20,000 to modify and install the machine. Cost savings from use of the new machine are expected to be $25,000 per year for 5 years, at which time the machine will be worn out and sold for its estimated scrap value of $5,000.The new machine will be depreciated using the simplified straight line method over its 5 year useful life, resulting in depreciation expense of $20,000 per year. The companys tax rate is 35%.Working capital is expected to increase by $10,000 at the inception of the project, but this amount will be recaptured at the end of year 5.What is the incremental free cash flow for year 1?
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