Question Details

Calculate the incremental initial cash flow associated with acquiring the replacement machine 


1. Replacement project. Existing machine was purchased 1 years ago at a cost of $20,000. For tax purposes, it is being depreciated straight line at $4,000 annually. It can be sold now for 12,000 or used for 4 more years at which time it will be sold for an estimated $2,500. It provides revenue of $15,000 annually and has cash costs of $4,200 annually.

A replacement machine can be purchased now for $26,000. It would be used for 4 years, and depreciated using straight line at $6,500 annually. It will result in total sales revenue of $20,000 annually, but because of its increased efficiency its cash expense would remain at $4,200 annually. It is expected to have a salvage value of $4,400 in 4 years. The new machine would require additional inventories of $800, and accounts payable would increase by $500.

The tax rate is 40% and the required rate of return is 10%.  

a. Calculate the incremental initial cash flow associated with acquiring the replacement machine (i.e., CF0).
B. Calculate the incremental annual operating cash flows. (They are the same each year, so do it for one year only.)
c. Calculate the incremental terminal cash flow.





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