Four years ago Jensen Inc. had purchase equipment for $2,100,000. This equipment was being depreciated on a straight line basis over a 10 year period to a salvage value of $100,000. The equipment has six more years of economic life, and during this period the annual revenues and operating costs associated with this machine are expected to be S650,000 and $300,000, respectively Jensen is now considering replacing this machine with a less expensive and more efficient one. 1,000,000. Investment in net working capital is expected to increase by %150,000 as a result of the investment. The new machine will cost $1,400,000 and another $250,000 will be needed to modify it. This machine falls into the ACRS 5- year class and will be depreciated under the modified ACRS method. It is also expected to have an economic life of 6 years. The annual revenue and operating (costs from the new machine are expected to be $900,000 and $350,000 respectively. At the sixth year Jansen expects to sell the net machine for $500,000. Jensen's marginal tax rate is 34%. This old equipment can be sold for a) Calculate Jensen's Net Investment if the old machine is replaced with the new one. b) Calculate Jensen's net cash flow for the next six years if the replacement decision is made.

Answer rating: 100% (QA)

To calculate Jensens net investment if the old machine is replaced with the new one we need to consider the costs associated with the new machine and ... View the full answer