In class problem #$2$ Asset Replacement Projects

IFC Corporation processes seafood with a machine it purchased several years ago for $$500,000$ with a current book value of $$250,000.$ IFC is considering replacing the existing machine with a new one costing $$700,000$ plus $$50,000$ for delivery and installation. The new unit will require IFC to increase investment in new working capital by $$40,000.$ The new machine will depreciated over $5$ years to a zero balance. IFC expects to sell the existing machine for $$275,000.$ IFC$$s tax rate is $40\%.$

With the new machine, IFC$$s revenues are expected to increase by $$100,000$ because the machine is faster and annual operating costs are expected to decrease by $$20,000($excluding depreciation$)$ for the $5$ years of the project. IFC estimates that its net working capital investment will increase by $$10,000$ per year for each year. After $5$ years, the new machine will be sold for $$70,000.$ The old machine is currently being depreciated at a rate of $$50,000$ per year.

Calculate the Net Investment

Asset Cost $\_\_\_\_\_\_700,000\_\_\_\_\_\_\_\_\_\_$

$+$ Delivery and Installation $\_\_\_\_\_\_\_50,000\_\_\_\_\_\_\_\_\_$

$=$ Total installed cost $\_\_\_\_\_\_750,000\_\_\_\_\_\_\_\_\_\_$

$-$ Proceeds from sale of old asset $\_\_\_\_\_\_\_275,000\_\_\_\_\_\_\_\_\_$

$+$ Tax on sale of old asset $\_\_\_\_\_\_10,000\_\_\_\_\_\_\_\_\_\_$

$+$ Net working capital $\_\_\_\_\_\_40,000\_\_\_\_\_\_\_\_\_\_$

$=$ Net Investment $\_\_\_\_\_\_525,000\_\_\_\_\_\_\_\_\_\_$

$$

Calculate Net Cash Flow

Year $0$ Year $1$ Year $2$ Year $3$ Year $4$ Year $5$

$\backslash$Delta Rev

$100,000$

$-\backslash$Delta Oper Cost

$-20,000$

$-\backslash$Delta Dep

$100,000$

$=\backslash$Delta OEBT $20,000$

$-$ Taxes

$=\backslash$Delta OEAT

$+\backslash$Delta Dep

$100,000$

$-\backslash$Delta NWC $10,00010,00010,00010,000-80,000$

$+$ After Tax Salvage $42,000$

$=$ NCF

$-525,000$