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Problem 3

ABC Inc. wishes to buy new machinery that would cost $166,000, but it would lead to increased output, higher sales, and higher costs. Moreover, the firm would receive $100,000 after taxes for the old machine. The new machine would result in sales of $120,000 per year versus old sales of $70,000, and the new costs would be $40,000 versus old costs of $20,000. Finally, the old machine was being depreciated at the rate of $10,000 per year, but the new machine would have $30,000 of annual depreciation. The marginal tax rate is 22 percent and WACC is 8 percent. Based on these figures, and assuming the new and old machines both have a life of four years, find the incremental cash flows.

Excel file

Problem 3 - Evaluating a Replacement Project N13 A 135134 Net Operating Profits (NOPAT) Add Back Depreciation Operating Cash Flow C D ?? ?? ?? \begin{tabular}{llll} ?? & ?? & ?? & ?? \\ \hline?? & ?? & ?? & ?? \\ \hline \hline \end{tabular} Net Operating Working Capital Increase in NOWC ?? ?? 9? ?? ?? ?? ?? ?? Total Annual Project Cash Flow ?? ?? ?? ?? ?? Free Cash Flow \begin{tabular}{lllll} \hline?2 & 2? & 2? & ?? & ?? \\ \hline \hline \end{tabular} Required Rate of Return (WACC) ?? NPV? ? IRR