A company is considering the purchase of a new machine that will enable it to increase its expected sales. The machine will have a direct cost of $100,000. In addition, the machine must be installed and tested. The costs of installation and testing will amount to $40,000. The machine will be depreciated using 5-years MACRS.
The equipment will be operated for 6 years. The sales in the first year of operation are expected to be $200,000. Then, sales will grow by 5% per year until the sixth year. The annual operating costs (before depreciation) will consist of fixed operating costs of $25,000 plus variable operating costs equal to 75% of sales.
To support the increased level of production, the inventory of raw materials will have to be increased from $40,000 to $50,000 when the machine is purchased. The additional inventory will be carried until the machine is scrapped following the 6 years of operation.
At the end of the 6-year operating life of the project, it is assumed that the equipment will be sold for $60,000. The tax rate is 40%.
If the new machine is purchased, it will be financed by borrowing the required funds at an interest rate of 8%. The company
A company is considering the purchase of a new machine that will enable it to increase its expected sales. The machine will have a direct cost of $100,000. In addition, the machine must be installed and tested. The costs of installation and testing will amount to $40,000. The machine will be depreciated using 5-years MACRS.
The equipment will be operated for 6 years. The sales in the first year of operation are expected to be $200,000. Then, sales will grow by 5% per year until the sixth year. The annual operating costs (before depreciation) will consist of fixed operating costs of $25,000 plus variable operating costs equal to 75% of sales.
To support the increased level of production, the inventory of raw materials will have to be increased from $40,000 to $50,000 when the machine is purchased. The additional inventory will be carried until the machine is scrapped following the 6 years of operation.
At the end of the 6-year operating life of the project, it is assumed that the equipment will be sold for $60,000. The tax rate is 40%.
If the new machine is purchased, it will be financed by borrowing the required funds at an interest rate of 8%. The company
Related questions
Replacement analysis
The Darlington Equipment Company purchased a machine 5 years ago at a cost of $90,000. The machine had an expected life of 10 years at the time of purchase, and it is being depreciated by the straight-line method by $9,000 per year. If the machine is not replaced, it can be sold for $5,000 at the end of its useful life.
A new machine can be purchased for $150,000, including installation costs. During its 5-year life, it will reduce cash operating expenses by $60,000 per year. Sales are not expected to change. At the end of its useful life, the 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%, 45%, 15%, and 7%.
The old machine can be sold today for $50,000. The firm's tax rate is 40%. The appropriate WACC is 9%.
If the new machine is purchased, what is the amount of the initial cash flow at Year 0? Round your answer to the nearest dollar. Negative amount should be indicated by a minus sign.
$
What are the incremental net cash flows that will occur at the end of Years 1 through 5? Round your answers to the nearest dollar.
| Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
| $ | $ | $ | $ | $ |
What is the NPV of this project? Round your answer to the nearest cent. Negative amount should be indicated by a minus sign.
$
Should Darlington replace the old machine?
