What is the npv of the replacement project

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Reference no: EM131312841

General Engine Corp. (GEC) has just finished minor renovations on their office building at a cost of $150,000. GEC originally allocated only $100,000 for this renovation. A memo from accounting suggests that the $50,000 cost overrun should be charged to the next new project the company will implement.

As its next project, General Engine Corp. is considering the acquisition of a new machine that would replace one of their old machines in use. The new machine costs $0.9 million (t=0), and it can be sold at the end of its expected 4- year operating life for $300,000. The new machine takes up more space and GEC will need to move maintenance and cleaning supplies that used to be stored next to the machine to a small storage room that could otherwise be sublet for $25,000 a year (at t=1 to t=4). The old machine was bought 8 years ago for $800,000 and can be sold for $300,000 today or for $150,000 in 4 years. GEC paid $25,000 for a study which indicates that the new machine will reduce manufacturing costs by $220,000 annually. Moreover, net working capital will be reduced by $150,000 when the new machine is installed, and will increase again by $150,000 at the end of the machine’s operating life. Both machines belong to asset class 43 with a CCA rate of 30%. GEC’s marginal tax rate is 40%, and it uses a discount rate (required rate of return, RRR) of 14% to evaluate projects of this nature.

a) What is the initial cash outlay (the total cash flow at t=0)?

b) What is the first year’s cash flow (excluding the CCA Tax Shield)?

c) What is the last year’s cash flow (excluding the CCA Tax Shield)?

d) What is the year 3 CCA?

e) What is the PV CCA Tax Shield?

f) What is the NPV of the replacement project?

g) Should General Engine Corp. replace the old machine with the new one?

Reference no: EM131312841

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