Company faces the decision to either keep an older, more expensive machine, or r

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 (name every relevant cashflow separately).

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

Answer )

There is no use of tax rate (25%) in calculation of cash flow , as tax is only applicable of income ( cash inflow) not on the expanses (cash outflow). Only data of cash outflow given in question .

Depreciation for old machine = Cost of acquisition - Book Value = £5,000,000.

Detailed Cash flow as per given data in question

Y0 Y1 Y2 Y3 Old machine Cost of acquisition -£8,000,000 Depreciation -£5,000,000 Cost of operation -£1,600,000 -£1,600,000 -£1,600,000 Net cash flow -£8,000,000 -£6,600,000 -£1,600,000 -£1,600,000 New machine Cost of acquisition -£5,000,000 Depreciation £0 Cost of operation -£900,000 -£900,000 -£900,000 Net cash flow -£5,000,000 -£900,000 -£900,000 -£900,000

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