A machine currently in use was originally purchased 2 years ago for $40,000. The machine is being depreciated under macrs using a 5 year recovery period, can be purchased at a price of $140,000 and requires $10,000 to install. If the new machine is acquired, the firm expects a $35,000 increase in current assets and a $15,000 increase in current liabilities. Earnings before depreciation, interest, and taxes are expected to be $70,000 for each of the next 3 years with the old machine, and to be $120,000 in the first 130,000 in the second and third year with the new machine. At the end of 3 years, the market price of the old machine will equal zero, but the new machine could be sold to net 35,000 before taxes the firm has 10% cost of capital and is subject to a 40% tax rate

1 calculate initial investment associated with proposed replacement decision

2 calculate the incremental operating cash inflows for years 1 to 4 associated with proposed replacement decision

3 calculate terminal cash flow associated with the proposed replacement decision, assuming that it is terminated at the end of year 3

4 determine the internal rate of return of the proposal, assuming that it is terminated at the end of year 3 and make your decision whether to accept or reject the replacement proposal

Y

The machine is 6) A machine currently in use was originally purchased 2 years aso for $40,000. T being depreciated under MACRS using a 5 year recovery period. The current sold at $42.000, A new machine, using a 3-year MACRS recovery psried, can be price of st40.000 and requires $10,000 to install. If the new machine is acquired expects a $35,000 increase in current assets and a $15,000 increase in current Earnings before depreciation, interest, and taxes are expected to be $20,000 for next 3 years with the old machine, and to be $120,000 in the first and $130,000 in the second and third year with the new machine. At the end of 3 years, the market price of the old purchased at a each of the machine will equal zero, but the new machine could be sold to net $35,000 before taxes. The firm has a 10% cost of capital and issubjectto'Aatate (45pts) TABLE 4.2 by recovery year Recovery year 3 years 5 years 7 years 33% 45 15 20% 32 19 12 12 14% 25 18 12 10 years 10% 18 14 12 7 6 6 6 Totals 100% 100% 100% Calculate the initial investment associated with the proposed replacement decision. (10 pts) alculate the (incremental) operating cash inflows for years 1 to 4 associated with the posed replacement decision. (15 pts) alculate the terminal cash flow associated with the proposed replacement decision, ming that it is terminated at the end of year 3. (10 pts) termine the internal rate of return (IRR) of the proposal, assuming that it is terminated at nd of year 3; and make your decision whether to accept or reject the replacement sal. (10 pts) The machine is 6) A machine currently in use was originally purchased 2 years aso for $40,000. T being depreciated under MACRS using a 5 year recovery period. The current sold at $42.000, A new machine, using a 3-year MACRS recovery psried, can be price of st40.000 and requires $10,000 to install. If the new machine is acquired expects a $35,000 increase in current assets and a $15,000 increase in current Earnings before depreciation, interest, and taxes are expected to be $20,000 for next 3 years with the old machine, and to be $120,000 in the first and $130,000 in the second and third year with the new machine. At the end of 3 years, the market price of the old purchased at a each of the machine will equal zero, but the new machine could be sold to net $35,000 before taxes. The firm has a 10% cost of capital and issubjectto'Aatate (45pts) TABLE 4.2 by recovery year Recovery year 3 years 5 years 7 years 33% 45 15 20% 32 19 12 12 14% 25 18 12 10 years 10% 18 14 12 7 6 6 6 Totals 100% 100% 100% Calculate the initial investment associated with the proposed replacement decision. (10 pts) alculate the (incremental) operating cash inflows for years 1 to 4 associated with the posed replacement decision. (15 pts) alculate the terminal cash flow associated with the proposed replacement decision, ming that it is terminated at the end of year 3. (10 pts) termine the internal rate of return (IRR) of the proposal, assuming that it is terminated at nd of year 3; and make your decision whether to accept or reject the replacement sal. (10 pts)