Read the case XYZ Company: An Integrated Capital Budgeting

Read the case XYZ Company: An Integrated Capital Budgeting Instructional Case” and answer the following question:

Should the replacement asset be purchased? That is, does it make economic (financial) sense for XYZ to replace the existing machine? Support your answer by clearly showing the tax basis of the replacement asset (if purchased and under the assumption that the existing asset would be sold outright rather than traded in) and the annual after-tax cash flows associated with both decision options. Remember to record appropriate depreciation expense under MACRS for the existing asset, assuming it is sold January 1, 2015. Recall that the pre-tax cash flow from the disposal of the existing asset is assumed to occur on January 1, 2015, while the tax savings due to depreciation deductions under MACRS, as well as tax-related effects of the disposal (if any), are assumed to be realized at the end of 2015. Base your recommendation on both an NPV analysis and a comparison of the IRR associated with each of the two investment alternatives (keep vs. replace). Comment on your comparative results. Round all calculations, including intermediate calculations, to whole numbers (i.e., to zero decimal points)


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