An egg grating company and egg extraction, is considering replacing an existing
ID: 2752668 • Letter: A
Question
An egg grating company and egg extraction, is considering replacing an existing piece of equipment with a more sophisticated machine. The following information is given as of today.
Table One:
Facts
Existing Machine
Proposed Machine
Costs
110,000.00
170,000.00
Installation
10,000.00
20,000.00
MACRS
5 - Years
5 - Years
Market Value
105,000.00
Purchased
2 years ago
Table Two
Forecasted Revenues
Year
Existing Machine
Proposed Machine
1
160,000.00
170,000.00
2
150,000.00
170,000.00
3
140,000.00
170,000.00
4
140,000.00
170,000.00
5
140,000.00
170,000.00
Forecasted Expenses (No Depreciation)
Year
Existing Machine
Proposed Machine
1
104,000.00
110,500.00
2
104,000.00
110,500.00
3
104,000.00
110,500.00
4
104,000.00
110,500.00
5
104,000.00
110,500.00
The firm pays 40 percent taxes on ordinary income and capital gains.
A. Given the information in Table 1, compute the initial investment.
B. Given the information in Table 2, compute the incremental annual cash flows.
C. Given the information from Table 1, assuming 13% rate of return, what is Chicken Coup Company’s Inc. NPV on the proposed machine.
Facts
Existing Machine
Proposed Machine
Costs
110,000.00
170,000.00
Installation
10,000.00
20,000.00
MACRS
5 - Years
5 - Years
Market Value
105,000.00
Purchased
2 years ago
Explanation / Answer
INITIAL INVESTMENT
COST OF THE PROPOSED MACHINE =$170000
ADD- INSTALATION COST =$20000
TOTAL COST OF MACHINE =$190000
DEPRICIATION ON OLD MACHINE IN MACRS METHOD FOR 2 YEARS
TOTAL PURCHASE PRICE OF OLD MACHINE WITH INSTALATION COST=$120000
LESS- DEPRICIATION FOR YEAR 1($120000 *20%) =($24000)
LESS- DEPRICIATION FOR YEAR 2($120000 * 32%) =($38400)
WRITTEN DOWN VALE OF OLD MACHINE =$57600
LESS- SELL PRICE OF OLD MACHINE =($105000)
PROFIT =$47400
TAX ON PROFIT @40% =$18960
TOTAL SELLPRICE OF OLD MACHINE =$105000
LESS TAX PAID =($18960)
TOTAL CASH INFLOW =$86040
TOTAL CASH OUT FLOW ON PURCHASE OF NEW MACHINE=$190000
TOTAL CASH INFLOW ON SELLING OF OLD MACHINE =$86040
TOTAL INITIAL CASH FLOW =$103960
CALCULATION OF INCREMENTAL CASH FLOW
INCREMENTAL REVENUE
YEAR EXISTING MACHINE PROPOSED MACHINE INCREMENTAL REVENUE
1 $160000 $170000 $10000
2 150000 170000 20000
3 140000 170000 30000
4 140000 170000 30000
5 140000 170000 30000
INCREMENTAL EXPENSES
YEAR EXISTING MACHINE PROPOSED MACHINE INCREMENTAL EXPENSES
1 $104000 $110500 $6500
2 104000 110500 6500
3 104000 110500 6500
4 104000 110500 6500
5 104000 110500 6500
INCREMENTAL CASH FLOW
YEAR REVENUE EXPENSES PROFIT CASH FLOW AFTER TAX
1 $10000 $6500 $3500 $2100
2 20000 6500 13500 8100
3 30000 6500 23500 14100
4 30000 6500 23500 14100
5 30000 6500 23500 14100
CALCULATION NPV
YEAR CASH FLOW DISCOUNTING FACTOR DISCOUNTED CASH FLOW
0 ($103960) 1.000 ($103960)
1 2100 0.885 1858
2 8100 0.783 6342
3 14100 0.693 9771
4 14100 0.613 8643
5 14100 0.543 7656
NPV =($69690)
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