replacement decision, Corporate Finance

Baobab rolling mills owns a lathe machine which was purchased 10years ago at sh. 75 million. The machine had an expected life of 15 yrs at the time it was purchased, and management estimated, and still believes, that the salvage value will be zero at the end of its 15 yrs life. The machine is being depreciated at on a straight line basis, therefore ots annual depreciation charge is sh. 5 million, and its present book value is sh.25 million. The R&D manager reports that a new special purpose machine can be purchased for sh. 120 million(including freight and installation of sh. 10 million and 30 million respectively) which, over itd 5 year life will reduce labour and raw materials usage sufficient to cut operating costs from sh. 70 million to sh. 40 million. It is estimated that the new machine can be sold for sh. 20 million at the end of its life. The old machine actual current market value is sh. 10 million, which is below its sh. 25 million book value. If the new machine were acquired, the old lathe would be sold to another company. Networking capital requirements will increase by sh. 10 million at the time of replacement. The company is in 40% tax bracket and the cost of capital is 12%. The company will maintain the straight basis of depreciating similar machines. Determine the following:
Net cashflows at the time of replacement?
incremental cashflows over the life of the new lathe?
net terminal cashflows at the end of new machines life?
payback period for the replacement decision?
net present value of the new lathe?
the replacement decision internal rate of return?
should the decision to replace be undertaken?
Posted Date: 11/20/2012 4:37:35 PM | Location : Kenya







Related Discussions:- replacement decision, Assignment Help, Ask Question on replacement decision, Get Answer, Expert's Help, replacement decision Discussions

Write discussion on replacement decision
Your posts are moderated
Related Questions
Benefits FCF is widely used valuation to estimate enterprise value. It measures the value of free cash flow which organisations generate from daily operating activities. DFCF m

#the managing directors of three profitable listed companies discussed their company''''s dividend policies. company A has deliberately paid no dividends for the past five years. c

Question: (a) With the help of illustrative and numerical examples differentiate fully speculation and arbitraging in the context of foreign exchange. (b) Shirley, a trade

Question: a) Give an analytical derivation of the Capital Asset Pricing Model (CAPM) and supplement your analysis with diagrammatic illustrations where appropriate. b) The

Analyse the budget shown below, and discuss any issues raised regarding cash flow and legal requirements. Suggest at least three alternative courses of action the organisation cou

differentiate between aloocative effiency and pricing effiency

Red Lake Mines, Inc. is considering adoption of a new project requiring a net investment of $10 million. The project is expected to generate 5 years of net cash inflows of $5 milli

hook industries is considering the replacement of one of its old drill presses. three alternatives replacement presses are under consideration. the relevant cash flows associated w

I would like to know if I can get some help completing my quiz for my finance class. The quiz consist of 10 questions

"The Code of Practice set out in the fourth schedule to the Employment Relations Act shall- (a) provide practical guidance for the promotion of good employment relations". (Se