Homework: Homework Three Score: 0 of 2 pts P12-31 (similar to) Se 8 of 10 (0 com

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Homework: Homework Three Score: 0 of 2 pts P12-31 (similar to) Se 8 of 10 (0 complete) Hw Score: 0%, 0 of 20 Question Holp (Replacement project cash flows) The Minot Kin Aircraft Company of Minot, North Dakota, uses a plasma cutter to fabricate metal aircraft parts for its plane kits. The company currently is using a cutter that it purchased four years ago that has a book value of $100,000 and is being depreciated $25,000 per year over the next 4 years. If the old cutter were to be sold today, the company estimates that it wouid bring in an amount equal to the book value of the equipment. The company is considering the purchase of a new automated plasma cutter that would cost $360,000 to install and that would be depreciated over the next 4 years toward a $43,000 salvage value using straight-line depreciation. The primary advantage of the new cuter is the fact that it is fully automated and can be run by one operator rather than the three employees that are currently required. The labor savings would be $90,000 per year. The firm faces an income tax rate of 25 percent. At the end of the 4-year project both cutters could be sold at their end-of-project book value. a. What are the differential operating cash flow savings per year during years 1 through4 for the new plasma cutter? b. What is the initial cash outlay required to replace the existing plasma cutter with the newer model? c. What does the timeline for the repiacement project cash fows for years 0 through 4 look like? d. Iif the comoany reauires a discount rate of 14 percent for new investments, shouid the plasma outter be replaced? The differontial operating cash fow savings per year during years 1 through 3 for the now cutter are s(Round to the nearest dollar) Enter your answer in the answer box and then click Check Answer parts Clear All

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a Differential operating cash flow for year 1 through 4 $90,000 b Initial capital cost            360,000 Less: Salvage value of old equipment, net of tax            100,000 Initial cash outlay $        260,000 Tax is 0 since book value and salvage value is same c The after-tax operating cash flow can be calculated as follows: Annual depreciation of new cutter = ($360,000 - $43,000)/4 = $79,250 Annual depreciation of old cutter = $25,000 Incremental EBIT = Revenue – (– cash labour cost) – incremental depreciation = 0 + $90,000 – ($79,250 - $25,000) = $35,750 After-tax operating cash flow = (Incremental EBIT)(1 – tax rate) + Incremental depreciation = $35,750 x (1 - 0.25) + $54,250 = $81,062.50 Year 4 cah flow includes alvage value of new equipment of 43000 -260000 81062.5 81062.5 81062.5 124062.5 0 1 2 3 4 d NPV = -260000 + 81062.50/1.14 + 81062.50/1.14^2 + 81062.50/1.14^3 + 124062.50/1.14^4 $                                                                                         1,652.26 Yes, since NPV of replacement is positive

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