Company faces the decision to either keep an older, more expensive machine, or r
ID: 2615352 • Letter: C
Question
Company faces the decision to either keep an older, more expensive machine, or replace it with a newer machine, which has a limited technical lifetime. All the available data can be found in the table below:
Using only the above data, please determine:
relevant cashflows in the next 3 years will be 6,917 for year1 , year 2 and year 3.
total cost of keeping the old machine for the next 3 years = 78,000
should Assemblor keep or replace the old machine, and explain why ?
Old machine acquisition cost New machine acquisition cost Bookvalue old machine today Yearly operational (outlay) cost old machine Yearly operational (outlay) cost new machine Sales value old machine today Sales value old machine end of useful life Tax rate Remaining useful life old machine in years Useful life new machine in years 80.000,00 50.000,00 30.000,00 16.000,00 9.000,00 31.000,00 25%Explanation / Answer
cost of new machine
50000
cost of old machine
80000
Depreciation on new machine =50000/3
depreciation on old machine =30000/3
incremental depreciation
after tax sale value of old machine
30750
book value of old machine
30000
16666.67
10000
6666.667
net cash outflow
19250
sale value of old machine
31000
gain on sale of old machine
1000
incremental annual savings
16000-9000
7000
after tax sale value = 31000-(1000*.25)
30750
Year
0
1
2
3
cash out flow
-19250
BEFORE TAX SAVINGS
7000
7000
7000
LESS INCREMENTAL DEPRECIATION
6666.667
6666.667
6666.667
AFTER DEPRECIATION SAVING
333.3333
333.3333
333.3333
LESS TAX - 25%
250
250
250
AFTER TAX SAVINGS
6666.667
6666.667
6666.667
NET OPERATING SAVING = AFTER TAX SAVINGS+ INCREMENTAL DEPRECIATION
6916.667
6916.667
6916.667
PRESENT VALUE OF CASH FLOW = CASH FLOW/(1+R)^N
npv = SUM OF PRESENT VALUE OF CASH FLOW
As discount rate = r is missing so answer can not be find
cost of new machine
50000
cost of old machine
80000
Depreciation on new machine =50000/3
depreciation on old machine =30000/3
incremental depreciation
after tax sale value of old machine
30750
book value of old machine
30000
16666.67
10000
6666.667
net cash outflow
19250
sale value of old machine
31000
gain on sale of old machine
1000
incremental annual savings
16000-9000
7000
after tax sale value = 31000-(1000*.25)
30750
Year
0
1
2
3
cash out flow
-19250
BEFORE TAX SAVINGS
7000
7000
7000
LESS INCREMENTAL DEPRECIATION
6666.667
6666.667
6666.667
AFTER DEPRECIATION SAVING
333.3333
333.3333
333.3333
LESS TAX - 25%
250
250
250
AFTER TAX SAVINGS
6666.667
6666.667
6666.667
NET OPERATING SAVING = AFTER TAX SAVINGS+ INCREMENTAL DEPRECIATION
6916.667
6916.667
6916.667
PRESENT VALUE OF CASH FLOW = CASH FLOW/(1+R)^N
npv = SUM OF PRESENT VALUE OF CASH FLOW
As discount rate = r is missing so answer can not be find
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