The Everly Equipment Company\'s flange-lipping machine was purchased 5 years ago

Question

The Everly Equipment Company's flange-lipping machine was purchased 5 years ago for $100,000. It had an expected life of 10 years when it was bought and is being depreciated by the straight-line method by $10,000 per year. As the older flange-lippers are robust and useful machines, this one can be sold for $20,000 at the end of its useful life. A new high-efficiency, digital-controlled flange-lipper can be purchased for $130,000, including installation costs. During its 5-year life, it will reduce cash operating expenses by $50,000 per year, although it will not affect sales. At the end of its useful life, the high-efficiency machine is estimated to be worthless. MACRS depreciation will be used, and the machine will be depreciated over its 3-year class life rather than its 5-year economic life, so the applicable depreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%. The old machine can be sold today for $50,000. The firm's tax rate is 35%, and the appropriate WACC is 14%.

A).If the new flange-lipper is purchased, what is the amount of the initial cash flow at Year 0? Round your answer to the nearest whole dollar. Enter negative answers with minus sign

B.)What are the incremental net cash flows that will occur at the end of Years 1 through 5? Round your answers to the nearest whole dollar.

CF1 $

CF2 $

CF3 $

CF4 $

CF5 $

C).What is the NPV of this project? Round your answer to the nearest whole dollar. $

D).Should Everly replace the flange-lipper?

Explanation / Answer

A).If the new flange-lipper is purchased, what is the amount of the initial cash flow at Year 0? Round your answer to the nearest whole dollar. Enter negative answers with minus sign

Initial cash flow at Year 0 = -130000 + 50000

Initial cash flow at Year 0 = -80000

B.)What are the incremental net cash flows that will occur at the end of Years 1 through 5? Round your answers to the nearest whole dollar.

CF1 = Reduction in cash operating expenses *(1-tax rate) + Increase in Annual Depreciation Tax shield

CF1 = 50000*(1-35%) + (130000*33.33% - 10000)*35%

CF1 = 44,165

CF2 = Reduction in cash operating expenses *(1-tax rate) + Increase in Annual Depreciation Tax shield

CF2 = 50000*(1-35%) + (130000*44.45% - 10000)*35%

CF2 = 49,225

CF3 = Reduction in cash operating expenses *(1-tax rate) + Increase in Annual Depreciation Tax shield

CF3 = 50000*(1-35%) + (130000*14.81% - 10000)*35%

CF3 = 35,739

CF4 = Reduction in cash operating expenses *(1-tax rate) + Increase in Annual Depreciation Tax shield

CF4 = 50000*(1-35%) + (130000*7.41% - 10000)*35%

CF4 = $ 32,372

CF5 = Reduction in cash operating expenses *(1-tax rate) + Increase in Annual Depreciation Tax shield - Post tax salvage value lost on old machine

CF5 = 50000*(1-35%) + (0 - 10000)*35% - 20000*(1-35%)

CF5 = 16000

C).What is the NPV of this project? Round your answer to the nearest whole dollar.

NPV = -Initial Cash Flow + CF1/(1+WACC) + CF2/(1+WACC)^2 + CF3/(1+WACC)^3 + CF4/(1+WACC)^4 + CF5/(1+WACC)^5

NPV = -80000 + 44165/1.14 + 49225/1.14^2 + 35739/1.14^3 + 32372/1.14^4 + 16000/1.14^5

NPV = $ 48,218

D).Should Everly replace the flange-lipper?

Yes Everly should replace the flange-lipper

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