Rick is considering replacing its copying machine old new cost when new 30000 50000 age 5 years 0 depreciation method straight line over 10 years to zero straight line over 10 years to zero salvage 5 years from today 0 25000 net working capital (t 0 only) returned at end of project 2000 5000 Market value today 18000 50000 remaining life 5 years 5 years The new machine is expected to increase revenue by 50,000 per year and operating expenses by 10,000 per year The tax rate is 40 percent, and the cost of capital is 15 percent A What is the initial investment for this project B What is the incremental cash flow per year C What is the difference in ending cash flow D Should they replace the machine

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Question: Rick is considering replacing its copying machine old new cost when new 30000 50000 age 5 years 0 depreciation method straight-line over 10 years to

Rick is considering replacing its copying machine

	old	new
cost when new	30000	50000
age	5 years	0
depreciation method	straight-line over 10 years to zero	straight-line over 10 years to zero
salvage 5 years from today	0	25000
net working capital (t=0 only) returned at end of project	2000	5000
Market value today	18000	50000
remaining life	5 years	5 years

The new machine is expected to increase revenue by 50,000 per year and operating expenses by 10,000 per year. The tax rate is 40 percent, and the cost of capital is 15 percent.

A. What is the initial investment for this project?

B. What is the incremental cash flow per year?

C. What is the difference in ending cash flow?

D. Should they replace the machine?

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