Question

you are given the following information for replacement project for machines.each machine currently in use has book value of $1 million and would continue to be depreciate in straight line basis value of over 5 next years.the plant engineer estimate that the old machines could be us as many as 10 more years. the purchase price for the new machine is $5 million apiece,which would be depreciate over a 10 years period on a straight line basis to a net book value of $500000 each.each new machine is expected to produce a pretax operating saving of $1.5 million per yer over the machine it would replace.you estimate that you could sell old machine for $250,000. installation of each machine would be expected to cost $600000 in addition to the purchase price.of this amount $500000 would be capitalized in the same way as the purchase price and the remaining $100000 would be expensed immediately. the increases inventory and account payable cause a required increased net working capital of W$20000.The tax rate is 4% {a} WHAT IS THE INITIAL CASH INVESTMENT FOR THE NEW EQUIPMENT (b)the sale of the machine currently in use would have two effects on future cash flows describe the positive effects(c) compute the initial out lay

Answer 1

a) Initial cash investment per machine = cost + installation capitalised - salvage of old + tax on gain of sale = $5m + $0.5m - $0.25m + (0.25 - 0.1) 0.04 = $5.256m per machine.

b) The sale of the machine currently in use would have two positive effects on future cash flows :

1) lower depreciation expense (due to lower initial cost)

2) lower interest expense ( due ot lower borrowing on lower initial cost)

c) Initial layout = cash expenses on acquisition of new machine + initial cash revenue expense + investment in working capital = $5.256m + $0.1m + $0.02m = $5.376m per machine

answered by: anonymous