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 $80,000. It had an expected life of 10 years when it was bought and is being depreciated by the straight-line method by $8,000 per year. As the older flange-lippers are robust and useful machines, it 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 $55,000. The firm's tax rate is 35%, and the appropriate WACC is 15%. 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. $ 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 $ What is the NPV of this project? Round your answer to the nearest whole dollar. $ Should Everly replace the flange-lipper?

Explanation / Answer

purchased 5 yrs ago 80000 sunk cost ignore Dep for 5 yrs 40000 WDV 40000 Purchase of new machine -130000 Sale of old machine 50000 New cost -80000 DEP 1 43329 2 57785 3 19253 4 9633 Total Dep 130000 Cashflow: Year 0 1 2 3 4 5 Initial invst -80000 Savings 50000 50000 50000 50000 50000 Dep 43329 57785 19253 9633 0 net savings 6671 -7785 30747 40367 50000 Tax 2334.85 -2724.75 10761.45 14128.45 17500 savings after tax 4336.15 -5060.25 19985.55 26238.55 32500 Add: dep 43329 57785 19253 9633 0 CF -80000 47665.15 52724.75 39238.55 35871.55 32500 DF 1 0.86956 0.75614 0.65751 0.57175 0.49717 DCF -80000               41,447.71    39,867.29    25,799.74    20,509.56    16,158.03 NPV    63,782.32 Since the NPV is postive the machine should be replaced

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