A company is considering replacing a painting machine purchased 9 years ago for
ID: 1181669 • Letter: A
Question
A company is considering replacing a painting machine purchased 9 years ago for $700,000. It has a market value today of $40,000. The unit costs $350,000 annually to operate and maintain. A new unit can be purchased for $800,000 and will have annual O&M costs of $120,000. If the old unit is retained, it will have no salvage value at the end of its remaining life of 10 years. The new unit, if purchased, will have a salvage value of $100,000 in 10 years. Analyze this using an EUAC measure and a MARR of 20% to perform a before-tax analysis to see if the painting machine should be replaced if the old painting machine is taken in as a trade-in for its market value of $40,000.
a. Use the cash flow approach (insider
Explanation / Answer
If New Machine Is Purchased Present Value of cash outflows Amount ($) Cost of new machine 800000 Less: Sale of Old Machine 40000 Present Value of cash outflows 760000 Present Value Of cash Inflows Decrease In Annual O&M Cost 230000 Less: Increase In Depreciation 35000 PBT 195000 Add:Depreciation 35000 Cash Profit After Tax 230000 Total 964160 Add: Present Value Of salvage 16100 (100000*0.161) Present Value Of cash Inflows 980260 Net Present Value 980260-760000= $220260 Notes Tax Benefit if available on sale of old machine can be availed Decision Old Machine should be replaced with the new Machine
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