MT Corporation has decided to replace an older model machine with a newer model machine. The...
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MT Corporation has decided to replace an older model machine with a newer model machine. The old machine cost $60,000 two years ago and was depreciated under MACRS (in Appendix) with a five-year recovery period. The old machine is currently worth $25,000 before clean-up and removal costs of $5,000. The new machine will cost $65,000, and the installation cost will be $12,000, and it will be depreciated under MACRS over a three-year recovery period. If the new machine is purchased, the account payable investment will rise by $20,000, the long-term debt will rise by $30,000, the inventory investment will rise by $10,000, and the account receivable investment will rise by $15,000. Earnings before depreciation, interest, and taxes are expected to be $50,000 for the next three years with the old machine; $120,000 in the first and second years, and $150,000 in the third, with the new machine. Each year, interest will be charged at a rate of $1,000. The market value of the old machine will be zero after three years, but the new machine could be sold for a profit of $22,000 before taxes. (A 40% tax rate on ordinary income and capital gains is assumed). Required: a) Calculate the initial investment associated with the proposed replacement decision. (8 marks) b) Calculate the incremental operating cash flows for years 1 to 4 associated with the proposed replacement. c) Calculate the terminal cash flows with the proposed replacement. (11 marks) (6 marks) MT Corporation has decided to replace an older model machine with a newer model machine. The old machine cost $60,000 two years ago and was depreciated under MACRS (in Appendix) with a five-year recovery period. The old machine is currently worth $25,000 before clean-up and removal costs of $5,000. The new machine will cost $65,000, and the installation cost will be $12,000, and it will be depreciated under MACRS over a three-year recovery period. If the new machine is purchased, the account payable investment will rise by $20,000, the long-term debt will rise by $30,000, the inventory investment will rise by $10,000, and the account receivable investment will rise by $15,000. Earnings before depreciation, interest, and taxes are expected to be $50,000 for the next three years with the old machine; $120,000 in the first and second years, and $150,000 in the third, with the new machine. Each year, interest will be charged at a rate of $1,000. The market value of the old machine will be zero after three years, but the new machine could be sold for a profit of $22,000 before taxes. (A 40% tax rate on ordinary income and capital gains is assumed). Required: a) Calculate the initial investment associated with the proposed replacement decision. (8 marks) b) Calculate the incremental operating cash flows for years 1 to 4 associated with the proposed replacement. c) Calculate the terminal cash flows with the proposed replacement. (11 marks) (6 marks)
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Calculate the initial investment associated with the proposed replacement decision The initial investment for the proposed replacement machine is 1370... View the full answer
Related Book For
Operations Management Managing Global Supply Chains
ISBN: 978-1506302935
1st edition
Authors: Ray R. Venkataraman, Jeffrey K. Pinto
Posted Date:
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