Nickup Inc. is considering replacing the machine it currently uses. The machine

Question

Nickup Inc. is considering replacing the machine it currently uses. The machine currently owned and operated originally cost $840,000. Its annual depreciation is $100,000. It was purchased 4 years ago, with an expected life of 8 years. Its salvage value today is $75,000 and its salvage value in 4 years is $40,000. The new machine costs $800,000, depreciated according to a straight-line schedule over 4 years with a salvage value of zero. It will save the company $300,000 per year. The tax rate is 30% and the company’s financing rate is 8.2%. According to the NPV, should the company replace the machine?

Select one:

a. The NPV is -292,543 and the company should not replace

b. None of the answers are correct

c. The NPV is 37200 and the company should not replace

d. The NPV is 37200 and yes the company should replace

e. The NPV is -292,543 and yes the company should replace

Explanation / Answer

b. None of the answers are correct Statement showing calculation of NPV Particulars Time PVF@8.2% Amount PV(Amount *PVF) Cash Outflows                                -                                        1.0000                        (800,000.000)                           (800,000.00) PV of Cash Outflows                           (800,000.00) Cash Inflows(Net of Tax)                         1.000                                      0.9242                           240,000.000                             221,811.46 Cash Inflows(Net of Tax)                         2.000                                      0.8542                           240,000.000                             205,001.35 Cash Inflows(Net of Tax)                         3.000                                      0.7894                           240,000.000                             189,465.20 Cash Inflows(Net of Tax)                         4.000                                      0.7296                           240,000.000                             175,106.47 Cash inflows(Salvage Value of old Machine)                                -                                        1.0000                           184,500.000                             184,500.00 PV of Cash Inflows                             975,884.49 NPV                             175,884.49 Life in Years                         4.000 Cost of Machine            800,000.000 Depreciation per year = 800,000/4            200,000.000 Depreciation on earlier Machine            100,000.000 Incremental dep(200,000-100,000)            100,000.000 Incremental Cash Flows(Savings)            300,000.000 Incremental Dep            100,000.000 Incremental Profit(300000-100000)            200,000.000 Tax Rate@30%               60,000.000 Profit after Tax(200,000-60,000)            140,000.000 Incremental Dep            100,000.000 CFAT(PAT+Dep)            240,000.000 Cost of old Machine            840,000.000 Dpreciation till now(100000*4)            400,000.000 Remaining cost            440,000.000 Salvage Value               75,000.000 Loss            365,000.000 Tax@30%            109,500.000 Net Salvage Value(75000+109500)            184,500.000

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