Question

The Everly Equipment Company's flange-lipping machine was purchased 5 years ago for $100,000. It had an expected life of 10 years when it was bought and is being depreciated by the straight-line method by $10,000 per year. As the older flange-lippers are robust and useful machines, this one can be sold for $20,000 at the end of its useful life. A new high-efficiency, digital-controlled flange-lipper can be purchased for $140,000, including installation costs. During its 5-year life, it will reduce cash operating expenses by $55,000 per year, although it will not affect sales. At the end of its useful life, the high-efficiency machine is estimated to be worthless. MACRS depreciation will be used, and the machine will be depreciated over its 3-year class life rather than its 5-year economic life, so the applicable depreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%. The old machine can be sold today for $55,000. The firm's tax rate is 35%, and the appropriate WACC is 12%.

Answer 1

Old Machine was purchased 5 year ago for $100,000 and and use straight-line method of depreciation.

Annual Depreciation = $10,000

Current Book Value of old machine = $100,000 - (5 × $10,000)

= $50,000

Book Value of old machine is $50,000 and market value is $55,000.

After tax net sale proceed = $50,000 + ($55,000 - $50,000) × (1 - 35%)

= $50,000 + $3,250

= $53,250

After tax net sale proceed from sale of old machine is $53,250.

Now, Annual cash flow and NPV of new machine at 12% discount rate is calculated in excel and screen shot provided below:

NPV of project is $81,538.73.

Since, NPV of project is a positive value, so project should be accepted.

answered by: anonymous