prroblem 11-14: The balboa bottling company is contemplating the replacement of
ID: 2449965 • Letter: P
Question
prroblem 11-14: The balboa bottling company is contemplating the replacement of one of its bottling machines with a newer and more efficient one. The old machine has a book value of $600,000 and a remaining useful life of 5 years. The firm does not expect to realize any return from scrapping the old machine in 5 years, but it can sell it now to another firm in the industry for $265,000. The old machine is being depreciated by $120,000 per year, using the straight-line method. The new machine has a purchase price of $1,175,000, an estimated useful life and MACRS life of 5 years, and an estimated salvage value of $145,000. The applicable depreciation rates are 20%, 32%, 19%, 12% and 6%. It is expected to economize the electric power usage, labor and repair costs, as well as to reduce the number of defective bottles. In total, an annual savings of $255,000 will be realized if the new machine is installed. The company's marginal tax rate is 35%, and it has a 12% WACC.
a. what is the initial net cash flow if the new machine is purchased and the old one is replaced?
b. what are the incremental net cash flows in Years 1 through 5
Explanation / Answer
a. Net CF for new machine = Cost of New amchine - Sale value of old machine = 1175,000- 265000 = $910,000 .................Ans (a) b. Dep pa as per MCARS = Yearly Rate*(Cost-Salevage) = Yrly rate*(1175000-145000) = yrly rate*1030000 SO Y1 Dep = 20%*1030000 = $206,000 So Net CF for Y1 = 255,000*(1-T) + Dep written back = 255000*0.65+206000=371750 Y2 Dep = 20%*1030000= $329,600 So Net CF for Y2 = 255000*0.65+329600=495350 Y3 Dep = 20%*1030000=$195,700 So Net CF for Y3 = 255000*0.65+195700=361450 Y4 Dep = 20%*1030000=$123,600 So Net CF for Y4 = 255000*0.65+123600=289350 Y5 Dep = 20%*1030000=$61,800 So Net CF for Y5 = 255000*0.65+61800 = 227550
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