Skydeck indicates that after four years of detailed cash flow development, it will assume that the year 4 incremental cash flows of the new machine over the old machine will grow at a compound annual rate of 2% from the end of year 4 to infinity. 

a. Find the incremental operating cash flows (including any working capital investment) for years 1 to 4, for Skydeck's proposed machine replacement decision. 

b. Calculate the terminal value of Skydeck's proposed machine replacement at the end of year 4. 

c. Show the cash flows (initial outlay, operating cash flows and terminal cash flow) for years 1 to 4, for Skydeck's proposed machine replacement.

d. Using the cash flows from part (c), find the NPV and IRR for Skydeck's proposed machine replacement. 

e. Based on your findings in part (d), what recommendation would you make to Skydeck regarding its proposed machine replacement?

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Skydeck wants to verify whether it will be a feasible investment idea to replace an existing metal body repair machine which they use it for motor vehicles. This machine can be fully depreciated machine. Currently they are considering to replace this old machine with a new one. The new machine will have an installation cost of $300,000 (after-tax) and can be depreciated under a three-year diminishing value schedule. A vendor is interested to buy the old machine for $80,000 (after taxes). The company pays 30% tax and requires a minimum return of 15% if it replaces the old machine. The company's forecasts for it's expenses (excluding depreciation) and revenues over the next four years are given below (all figures are in $ thousands): Year Revenue 1 2 3 4 $925 990 1,000 1,100 New machine Expenses (excluding depreciation) $740 780 825 875 Revenue Expenses (excluding depreciation) $625 645 670 Old machine 695 $580 595 610 630 Skydeck also considers that the values of various current accounts could be impacted by the proposed replacement. These estimates over the next four years time are shown below for both machines. Currently (which means at time 0), the company's net investment in these current accounts is expected to be $110,000 with the new machine and $75,000 with the old machine. Skydeck wants to verify whether it will be a feasible investment idea to replace an existing metal body repair machine which they use it for motor vehicles. This machine can be fully depreciated machine. Currently they are considering to replace this old machine with a new one. The new machine will have an installation cost of $300,000 (after-tax) and can be depreciated under a three-year diminishing value schedule. A vendor is interested to buy the old machine for $80,000 (after taxes). The company pays 30% tax and requires a minimum return of 15% if it replaces the old machine. The company's forecasts for it's expenses (excluding depreciation) and revenues over the next four years are given below (all figures are in $ thousands): Year Revenue 1 2 3 4 $925 990 1,000 1,100 New machine Expenses (excluding depreciation) $740 780 825 875 Revenue Expenses (excluding depreciation) $625 645 670 Old machine 695 $580 595 610 630 Skydeck also considers that the values of various current accounts could be impacted by the proposed replacement. These estimates over the next four years time are shown below for both machines. Currently (which means at time 0), the company's net investment in these current accounts is expected to be $110,000 with the new machine and $75,000 with the old machine.

Answer rating: 100% (QA)

SOLUTION IN DETAILS To evaluate the feasibility of replacing the existing machine with a new one we need to calculate the net present value NPV of the ... View the full answer