DeYoung Entertainment Enterprises is considering replacing the latex molding machine it uses to fabricate rubber chickens with a newer, more efficient model. The old machine has a book value of $450,000 and a remaining useful life of 5 years. The current machine would be worn out and worthless in 5 years, but DeYoung can sell it now to a Halloween mask manufacturer for $135,000. The old machine is being depreciated by $90,000 per year for each year of its remaining life. If DeYoung doesn't replace the old machine, it will have no salvage value at the end of its useful life.
The new machine has a purchase price of $775,000, an estimated useful life and
MACRS class life of 5 years, and an estimated salvage value of $105,000. The applicable depreciation rates are 20.00%, 32.00%, 19.20%, 11.52%, 11.52%, and 5.76%. Being highly efficient, it is expected to economize on electric power usage, labor, and repair costs, and, most importantly, to reduce the number of defective chickens. In total, an annual savings of $185,000 will be realized if the new machine is installed. The company's marginal tax rate is 25%, and the project cost of capital is 12%.
D: What are the total incremental project cash flows in Years 0 through 5? What is the NPV?
Please show excel formulas - A-C was previously answered and shown below
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Tax |
25% |
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A: |
Initial Cash Flow |
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NEW Machine |
$ 775,000 |
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Salvage value of old machine |
135000 |
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Old Depreciation |
$ 90,000 |
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Book Value |
450000 |
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5 Year Salvage |
$ 105,000 |
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Total Gain |
-315000 |
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Year 5 Depreciation Rate |
5.76% |
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Tax |
-78750 |
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After Tax Value Old Machine |
213750 |
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Initial Cash Flow |
$561,250 |
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Incremental depreciation Tax Shield |
Rates |
Depreciation of new Machine |
Incremental Depreciation |
Incremental Depreciation Tax Shield |
B: |
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MACRS Rate Year 1 |
0.2 |
155000 |
65000 |
$ 16,250.00 |
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MACRS Rate Year 2 |
0.32 |
248000 |
158000 |
$ 39,500.00 |
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MACRS Rate Year 3 |
0.192 |
148800 |
58800 |
$ 14,700.00 |
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MACRS Rate Year 4 |
0.1152 |
89280 |
-720 |
$ (180.00) |
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MACRS Rate Year 5 |
0.1152 |
89280 |
-720 |
$ (180.00) |
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C: |
After-Tax salvage value at Year 5 of New Machine |
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Salvage Value |
$ 105,000 |
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Book Value |
$ 44,640 |
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Gain |
$ 60,360 |
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Tax |
$ 15,090 |
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After tax year 5 salvage rate |
$ 89,910 |
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D: |
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