Question: A company is replacing an existing machine to improve efficiency. They plan to sell the existing machine which will net $3,000 after tax, and this
A company is replacing an existing machine to improve efficiency. They plan to sell the existing machine which will net $3,000 after tax, and this will be used to pay for part of the replacement machine. The change in free cash flows (i.e., the incremental free cash flows) expected from replacing this machine are forecasted as shown below. At the end of the final year shown, the replacement machine will be fully depreciated and the company might sell it, or they might continue to use it, so they have decided to not include the salvage value in the final year's cash flow. The company has a 11.73% cost of capital (i.e., the required rate of return is 11.73%).
| Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
| Initial Investment | $553,000 | $460,000 | $381,000 | $263,000 | $138,000 |
What is the maximum amount, including the effect of using the net proceeds from disposition of the existing machine, which the company should spend for this new machine (i.e., what is the highest price tag the machine can have)?
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1 The company will receive 3000 from selling the existing machine This ca... View full answer
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