8. Replacement analysis Aa Aa Green Moose Industries is a company that produces
ID: 2787087 • Letter: 8
Question
8. Replacement analysis Aa Aa Green Moose Industries is a company that produces iWidgets, among several other products. Suppose that Green Moose Industries considers replacing its old machine used to make iWidgets with a more efficient one, which would cost $1,800 and require $250 annually in operating costs except depreciation. After-tax salvage value of the old machine is $600, while its annual operating costs except depreciation are $1,100. Assume that, regardless of the age of the equipment, Green Moose Industries's sales revenues are fixed at $3,500 and depreciation on the old machine is $600. Assume also that the tax rate is 40% and the project's risk-adjusted cost of capital, r, is the same as weighted average cost of capital (WACC) and equals 10% , and they are constant over four Based on the data, net cash flows (NCFs) before replacement are years Although Green Moose Industries's NCFs before replacement are the same over the 4-year period, its NCFs after replacement vary annually. The following table shows depreciation rates over four years Year 1 Year 2 Year 3 Year 4 Depreciation rates 33.33% 44.45% 14.81% 7.41% Complete the following table and calculate incremental cash flows in each year. Hint: Round your answers to the nearest dollar and remember to enter a minus sign if the calculated value is negative Year O Year 1 Year 2 Year 3 Year 4 New machine cost After-tax salvage value, old machine Sales revenues Operating costs except depreciation Operating income After-tax operating income Net cash flows after replacement (adding back depreciation) Incremental Cash Flows $1,800 $600 $3,500 $250 $3,500 $250 $3,500 $250 $3,500 $250Explanation / Answer
cost of machine
Depreciation rate
annual depreciation
Net cash flow before replacement
1800
33.33%
599.94
sales revenue
3500
1800
44.45%
800.1
less operating cost
1100
1800
14.81%
266.58
less depreciation
600
1800
7.41%
133.38
operating profit
1800
less tax 40%
720
after tax cash flow
1080
add depreciation
600
Net cash flow before replacement
1680
Year
0
1
2
3
4
New machine cost
-1800
after tax salavge value of old machine
-600
sales revenue
3500
3500
3500
3500
less operating cost except depreciation
250
250
250
250
less depreciation
599.94
800.1
266.58
133.38
operating profit
2650.06
2449.9
2983.42
3116.62
less tax 40%
1060.024
979.96
1193.368
1246.648
after tax profit
1590.036
1469.94
1790.052
1869.972
add depreciation
599.94
800.1
266.58
133.38
net cash flow after replacement
-2400
2189.976
2270.04
2056.632
2003.352
Incremental operating cash flow = net cash flow after replacement -net cash flow before replacement
-2400
509.976
2270.04
2056.632
2003.352
cost of machine
Depreciation rate
annual depreciation
Net cash flow before replacement
1800
33.33%
599.94
sales revenue
3500
1800
44.45%
800.1
less operating cost
1100
1800
14.81%
266.58
less depreciation
600
1800
7.41%
133.38
operating profit
1800
less tax 40%
720
after tax cash flow
1080
add depreciation
600
Net cash flow before replacement
1680
Year
0
1
2
3
4
New machine cost
-1800
after tax salavge value of old machine
-600
sales revenue
3500
3500
3500
3500
less operating cost except depreciation
250
250
250
250
less depreciation
599.94
800.1
266.58
133.38
operating profit
2650.06
2449.9
2983.42
3116.62
less tax 40%
1060.024
979.96
1193.368
1246.648
after tax profit
1590.036
1469.94
1790.052
1869.972
add depreciation
599.94
800.1
266.58
133.38
net cash flow after replacement
-2400
2189.976
2270.04
2056.632
2003.352
Incremental operating cash flow = net cash flow after replacement -net cash flow before replacement
-2400
509.976
2270.04
2056.632
2003.352
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