Tried and true home repair is considering replacement of its bobcat. The old Mac
ID: 2720257 • Letter: T
Question
Tried and true home repair is considering replacement of its bobcat. The old Machine cost $150,000 and was depreciated using a 5 year straight line depreciation schedule. The machine has been in operation for three years. It could be sold for $30,000 today. The new machine would cost $200,000 with $10,000 shipping. The firm will depreciate the equipment using a 5 year MACRS schedule. At the end of four years, the equipment can be sold for $50,000. The tax rate is 40%. The efficiency of the new machine will generate incresed sales revenues of $120,000 per year with COGS of $50,000. The firm's A/R will rise by $30,000 and AP will rise by $20,000. The wacc is 9%. Should you replace the bobcat? Use NPV and IRR to make your decision and explain your decision. Make depreciation schedules. Show all steps and formulas.
Explanation / Answer
MACRS Tax @40% Earnings Cashflows Year percentage Depreciation Revenue COGS Net Income on Net income after tax (add: Depreciation) 1 20.00% (42,000.00) $ 120,000.00 $ (50,000.00) $ 28,000.00 $ 11,200.00 $ 16,800.00 $ 58,800.00 2 32.00% (67,200.00) $ 120,000.00 $ (50,000.00) $ 2,800.00 $ 1,120.00 $ 1,680.00 $ 68,880.00 3 19.20% (40,320.00) $ 120,000.00 $ (50,000.00) $ 29,680.00 $ 11,872.00 $ 17,808.00 $ 58,128.00 4 11.52% (24,192.00) $ 120,000.00 $ (50,000.00) $ 45,808.00 $ 18,323.20 $ 27,484.80 $ 51,676.80 Initial Solvage Sale of Working Operating Year Cash Value Old Machine Capiral Cashflow Net Cashflows 0 (210,000.00) 30,000.00 (10,000.00) (190,000.00) 1 $ 58,800.00 58,800.00 2 $ 68,880.00 68,880.00 3 $ 58,128.00 58,128.00 4 50000 $ 51,676.80 101,676.80 Present Value using Discount Rate of: Year cashflows pv factor at 9% Present Value 16% 17% 17.28% 18% 19% 20% 0 (190,000.00) 1.00000 (190,000.00) -190000.00 -190000.00 -190000.00 -190000.00 -190000.00 -190000.00 1 58,800.00 0.91743 53,944.95 50689.66 50256.41 50137.28 49830.51 49411.76 49000.00 2 68,880.00 0.84168 57,974.92 51189.06 50317.77 50079.51 49468.54 48640.63 47833.33 3 58,128.00 0.77218 44,885.48 37240.15 36293.41 36035.93 35378.50 34494.07 33638.89 4 101,676.80 0.70843 72,030.41 56155.19 54259.83 53747.18 52443.76 50703.04 49033.95 Total 38,835.76 5,274.06 1,127.42 (0.11) (2,878.69) (6,750.49) (10,493.83) pv factor at 9% = 1/1.09^n, where n = 0 to 4 Present Value = pv factor x cash flows Present Value = Cashflow/(1+r)^n, where r = discount rate, n = no of year from 0 to 4 Present Value of the project 38,835.76 IRR of the project 17.28% because Present value is more than 0 and having a IRR of 17.28% which is far higher than the required rate of return, Project must be accepted.
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