Replacement analysis
Course:- Financial Management
Reference No.:- EM13216

Assignment Help
Expertsmind Rated 4.9 / 5 based on 47215 reviews.
Review Site
Assignment Help >> Financial Management

The Dauten Toy Corporation currently uses an injection molding machine that was purchased 2 years ago.  This machine is being depreciated on a straight-line basis, and it has 6 years of remaining life.  Its current book value is $2,100, and it can be sold for $2,500 at this time. Thus, the annual depreciation expense is $2,100/6 = $350 per year.  If the old machine is not replaced, it can be sold for $500 at the end of its useful  life.

 Dauten is offered a replacement machine which has a cost of $8,000, an estimated useful life of 6 years, and an estimated salvage value of $800. This machine falls into the MACRS 5-year class so the applicable depreciation rates are 20%, 32%, 19%, 12%, 11%, and 6%. the replacement machine would permit an output expansion, so sales would rise by $1,000 per  year; even so, the new machine's much greater efficiency would cause operating expenses to decline by $1,500 per year. the new machine would require that inventories be increased by $2,000, but accounts payable would simultaneously increase by $500. Dauten's marginal federal-plus-state tax rate is 40%, and its WACC is 15%. Should it replace the old machine?

Here we have the calculation to find the solution.

Net cash flow at t = 0:

Purchase price

Sale of old machine

Tax on sale of old machine  

Change in net working capital  

Total investment

Annual cash inflows:

Sales increase

Cost decrease

Pre-tax revenue increase  

Tax benefit

After-tax revenue increase  


Year 1 Year 2 Year 3 Year 4







Depreciation tax savings        

Calculate NPV:

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
Net investment
After-tax revenue increase              
Depreciation tax savings              
Working capital recovery              
Salvage value of new machine              
Tax on salvage value              
Opportunity cost of old machine              
Project cash flows

NPV =   

Replace old machine (Yes/No)?  

Put your comment

Ask Question & Get Answers from Experts
Browse some more (Financial Management) Materials
Calculate the value of a five-month European put futures option when the futures price is $19, the strike price is $20, the risk-free interest rate is 12% per annum, and the
Firm A just paid a dividend of $2.50 per share. This dividend is expected to grow at a rate of 18% over the next three years and then grow at a rate of 3% after that into the
The CFO of Ramekin Pottery Inc. is concerned about holding up the price of the company's stock. He's asked you to do an analysis starting with an estimate of the return invest
At an output level of 53,000 units, you calculate that the degree of operating leverage is 3.21. If output rises to 57,000 units, what will the percentage change in operating
Viking Manufacturing, Inc. currently begins each sales cycle with 12,500 vacuum cleaners in stock. This stock is depleted at the end of each sales cycle and then reordered. Wh
A company's 5-year bonds are yielding 9.15% per year. Treasury bonds with the same maturity are yielding 6.55% per year, and the real risk-free rate (r*) is 2.45%. The average
Elmer’s Glues are produced in upstate New York and sold throughout the country. Shipment is either direct from the factory or via regional warehouses, including one in the Los
Suppose that Texas Trucking (TT) has earnings per share of $3.55 and EBITDA of $55 million. TT also has 6 million shares outstanding and debt of $200 million (net of cash). OL