B Company is considering replacing an existing processor with a new one that cos

Question

B Company is considering replacing an existing processor with a new one that costs $220,000. Shipping and setup costs for the new processor are estimated.to be $14,000. B Company's working capital is expected to increase by $16,000 when the new processor begins operation and is expected to be fully recoverable at the end of the project. The new processor's useful life is expected to be 5 years and its salvage value at that point is estimated to be $49,000. The old processor had an installed cost of $130,000 when it was placed in service three years ago and is being depreciated to a zero book value using a 5 year ACRS life. The processor can be sold today for $35,300. The increase in revenues and before tax cash operating expenses for the new processor compared to continuing with the old processor are shown in the table below B Company has a marginal tax rate of 34% and a cost of capital of 12%.

The initial investment for the project is?
The installed cost of the new processor is?
Incremental depreciation expense for year 2 in the life of the new processor is?
Operating Cash Flow After Tax (OCFAT) for year 3 of the life of the new processor is?
After tax salvage value of the new processor at the end of year 5 is?
Operating cash flow after tax (OCFAT) for year 5 of the life of the new processor is?
NPV of the project is?

Year Incremental Revenues Incremental Cash Operating Expenses ACRS Depr. % 1 $87,000 $20,000 15 2 $80,000 $19,000 22 3 $93,000 $28,000 21 4 $86,000 $26,000 21 5 $90,000 $27,000 21

Explanation / Answer

Initial investment for the project:

The installed cost of the new processor is $ 234,000

Incremental depreciation for the new processor in year 2 is $ 51,480

OCFAT in year 3 is $ 92,040

After tax salvage value of the new processor at the end of year 5 is $ 32,340

OCFAT for year 5 is $ 90,720

NPV of the project is $ 130,068

T

Cost of the plant $ 220,000 Shipping and setup costs 14,000 Working capital needed 16,000 Salvage value of old plant (35,300) Initial cash outlay 214,700

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