Question

The supervisor of the county Department of Transportation (DOT) is considering the replacement of some machinery. This machinery has zero book value but its current market value is $910. One possible alternative is to invest in new machinery, which has a cost of $40,100. This new machinery would produce estimated annual operating cash savings of $13,050. The estimated useful life of the new machinery is four years. The DOT uses straight-line depreciation. The new machinery has an estimated salvage value of $2,110 at the end of four years. The investment in the new machinery would require an additional investment in working capital of $3,000, which would be recovered after four years.

If the DOT accepts this investment proposal, disposal of the old machinery and investment in the new equipment will take place on December 31, 20x1. The cash flows from the investment will occur during the calendar years 20x2 through 20x5.

Use Appendix A for your reference. (Use appropriate factor(s) from the tables provided.)

Required:

Prepare a net-present-value analysis of the county DOT’s machinery replacement decision. The county has a 10 percent hurdle rate. (Round your "Discount factors" to 3 decimal places and final dollar amounts to whole dollars. Negative amounts should be indicated by a minus sign.)

	Time 0	Time 1	Time 2	Time 3	Time 4
Acquisition cost
Investment in working capital
Recovery of working capital
Salvage value of old machinery
Salvage value of new machinery
Annual operating cash savings
Total cash flow	$0	$0	$0	$0	$0
Discount factor
Present value	$0	$0	$0	$0	$0
Net present value

Answer 1

				Time 0	Time 1	Time 2	Time 3	Time 4
Acquisition cost				-40100
Investment in Working capital				-3000
Recovery of Working capital								3000
Salvage value of old machinery				910
Salvage value of New machinery								2110
Annual operating cash flows					13050	13050	13050	13050
Total Cashflows				-42190	13050	13050	13050	18160
Discount factor				1.00	0.91	0.83	0.75	0.68
Present Value				-42190	11863.636	10785.12	9804.658	12403.5
Net Present value								2667