ALC corp is considering to replace an old machine used in production with a new technically improved one. This old machine has 10 more years of useful life, its current book value is $800,000 and its current market value is $950,000. After 10 years the residual value will be $200,000. The old machine will be sold if company decides to buy the new machine. The new technically improved machine costs $2 million. It will be used for 10 years and the residual value will be $500,000. The new machine will have lower operating costs. The annual cash operating costs information for both machines are as follows Old machine new machine

For first 5 years $400,000 $100,000

For next 3 years $450,000 $180,000

For last 2 years $480,000 $240,000

Both machines will be overhauled after 5 years (end of year 5). If the company continued with old machine the overhaul cost will be $80,000. Overhaul cost for new machine will be $50,000. The company’s income tax rate is 25%. The required rate is 12%.

1. Calculate the net after tax cash investment if new machine is purchased.

2. Calculate the after tax cash flows for each year if the new machine is purchased and used

3. Calculate the after tax cash flows for each year if the old machine is used.

4. Using NPV analysis and your answers for question 1, 2, and 3, determine if the company should buy the new machine. How do I calculate this?

Answer rating: 100% (QA)

Net after tax cash investment if new machine is purchased Amount Purchased cost of new machine 2000000 Less Sale value realised from sale of Old Machi... View the full answer