Replacement Analysis
DeYoung Entertainment Enterprises is considering replacing the
latex molding machine it uses to fabricate rubber chickens with a
newer, more efficient model. The old machine has a book value of
$600,000 and a remaining useful life of 5 years. The current
machine would be worn out and worthless in 5 years, but DeYoung can
sell it now to a Halloween mask manufacturer for $270,000. The old
machine is being depreciated by $120,000 per year for each year of
its remaining life.
The new machine has a purchase price of $1,165,000, an estimated
useful life and MACRS class life of 5 years, and an estimated
salvage value of $105,000. The applicable depreciation rates are
20.00%, 32.00%, 19.20%, 11.52%, 11.52%, and 5.76%. Being highly
efficient, it is expected to economize on electric power usage,
labor, and repair costs, and, most importantly, to reduce the
number of defective chickens. In total, an annual savings of
$255,000 will be realized if the new machine is installed. The
company's marginal tax rate is 35% and the project cost of capital
is 16%.
- Replacement Analysis Deyoung Entertainment Enterprises Is Considering Replacing The Latex Molding Machine It Uses To Fab 1 (63.86 KiB) Viewed 13 times
Problem 11-14 Replacement Analysis DeYoung Entertainment Enterprises is considering replacing the latex molding machine it uses to fabricate rubber chickens with a newer, more efficient model. The old machine has a book value of $600,000 and a remaining useful life of 5 years. The current machine would be worn out and worthless in 5 years, but DeYoung can sell it now to a Halloween mask manufacturer for $270,000. The old machine is being depreciated by $120,000 per year for each year of its remaining life. The new machine has a purchase price of $1,165,000, an estimated useful life and MACRS class life of 5 years, and an estimated salvage value of $105,000. The applicable depreciation rates are 20.00%, 32.00%, 19.20%, 11.52%, 11.52%, and 5.76%. Being highly efficient, it is expected to economize on electric power usage, labor, and repair costs, and, most importantly, to reduce the number of defective chickens. In total, an annual savings of $255,000 will be realized if the new machine is installed. The
company's marginal tax rate is 35% and the project cost of capital is 16%. a. What is the initial net cash flow if the new machine is purchased and the old one is replaced? Round your answer to the nearest dollar. b. Calculate the annual depreciation allowances for both machines, and compute the change in the annual depreciation expense if the replacement is made. Do not round intermediate calculations. Round your answers to the nearest dollar. Depreciation Allowance, New Depreciation Allowance, Old Change in Depreciation Year 1 2 $ $ 3 $ $ $ 4 $ $ 5 c. What are the incremental net cash flows in Years 1 through 5? Do not round intermediate calculations. Round your answers to the nearest dollar. CF1 CF₂ CF3 CF4 $ CF5 $ d. Should the firm purchase the new machine? -Select- ✔ Support your answer. Do not round intermediate calculations. Round your answer to the nearest dollar. NPV: $