The Wolf Pack Company is considering replacing an existing machine with a newer,
ID: 2451784 • Letter: T
Question
The Wolf Pack Company is considering replacing an existing machine with a newer, more efficient version. The old machine was purchased 2 years ago at a cost of $40,000, and this amount was being depreciated under MACRS using a 3-year recovery period. The machine has 3 years of usable life remaining. The new machine that is being considered costs $75,000 and requires $7,500 in installation costs. The new machine would also be depreciated under the MACRS 3-year recovery period. The firm can sell the old machine for $12,500 without incurring any removal or cleanup costs. The firm pays a tax rate of 40% on ordinary income. The revenues and expenses (excluding depreciation) associated with the old and new machine for the next 3 years are listed in the table below:
New Machine Old Machine
Year Revenue Expenses Revenue Expenses
1 $575,000 $525,000 $475,000 $460,000
2 625,000 535,000 500,000 465,000
3 650,000 550,000 550,000 478,000
calculate the initial outlay associated with the replacement of the old machine
determine the incremental, after-tax operating cash inflows associated with the proposed replacement (be sure to include the relevant depreciation flow in year 4)
Explanation / Answer
Working Notes:
Cost of the new machine 75000 Add: Installation charge 7500 Cost to be capitalized 82500 Less: Sale value of the old machine -12500 Initial outlay associated with the old machine 70000Related Questions
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