Chapter $11$: Capital Budgeting Cash Flows

Integrative: Determining relevant cash flows

Atlantic Drydock is considering replacing an existing hoist with one of two newer, more efficient pieces of equipment. The existing hoist is $3$ years old, cost $$32,000,$ and is being depreciated under MACRS using a $5-$year recovery period. Although the existing hoist has only $3$ years $($years $4,5,$ and $6)$ of depreciation remaining under MACRS, it has a remaining usable life of $5$ years. Hoist $A,$ one of the two possible replacement hoists, costs $$40,000$ to purchase and $$8,000$ to install. It has a $5-$year usable life and will be depreciated under MACRS using a $5-$year recovery period. Hoist B costs $$54,000$ to purchase and $$6,000$ to install. It also has a $5-$year usable life and will be depreciated under MACRS using a $5-$year recovery period.

Increased investments in net working capital will accompany the decision to acquire hoist A or hoist B$.$ Purchase of hoist A would result in a $$4,000$ increase in net working capital; hoist B would result in a $$6,000$ increase in net working capital. The proposed earnings before depreciation, interest, and taxes with each alternative hoist and the existing hoist are given in the following tables.

$\backslash$table$[[,$Earnings before depreciation, interest, and taxes$],[$Year$,$With hoist A$,$With hoist B$,$With existing hoist$],[1,$$$21,000,$$$22,000,$$$14,000$