Capital Budgeting

Example: Replacement Project Analysis:

$($show all working and formulas$)$

Suppose Mayco wants to replace an existing printer with a new high speed copier. The existing printer was purchased $10$ years ago at a cost of $$15,000.$ The printer is being depreciated using straight line basis assuming a useful life of $15$ years and no salvage value.

The new high$-$speed copier can be purchased for $$24,000($included freight and installation$).$ It will reduce labor and raw material usage sufficiently to cut annual operating expense from $$14,000$ to $$8,000.$

It is estimated the new copier can be sold for $$4,000$ at the end of five years. The old printer current market value is $$2,000.$ If new printer is acquired the old printer will be sold to another company on its market value.

The company's marginal tax rate is $40\%$ and the replacement. Net working capital requirements will also increase by $$3,000$ at the time of replacement. The project cost of capital is $11\mathrm{.}5\%$ and new printer will be depreciated by WDV method $20\%$ :

Depreciation in years: $1$:$$4,800,2$:$$3,840,3$:$$3,072,4$:$$2,458,5$:$$1,966$

Compute Initial Investment outlay, operating cash flow over the project's life and the terminal year cash flows for Mayco's replacement project. Then determine whether project should be accepted using NPV analysis.