Cuda Marine Engines, Inc. must develop the relevant cash flows for a replacement capital investment proposal. The proposed asset costs $50,000 and has installation costs of $3,000. The asset will be depreciated using a five-year recovery schedule. The existing equipment, which originally cost $25,000 and will be sold for $10,000, has been depreciated using an MACRS five-year recovery schedule and three years of depreciation has already been taken. The new equipment is expected to result in incremental before-tax net profits of $15,000 per year. The firm has a 40 percent tax rate.
Cuda Marine Engines, Inc. must develop the relevant cash flows for a replacement capital investment proposal. The proposed asset costs $50,000 and has installation costs of $3,000. The asset will be depreciated using a five-year recovery schedule. The existing equipment, which originally cost $25,000 and will be sold for $10,000, has been depreciated using an MACRS five-year recovery schedule and three years of depreciation has already been taken. The new equipment is expected to result in incremental before-tax net profits of $15,000 per year. The firm has a 40 percent tax rate.
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IntegrativeâDetermining relevant cash flows Atlantic Dry dock is considering replacing an existing hoist with one of two newer, more efficient pieces of equipment. The existing hoist is 3 years old, cost $31,500, and is being depreciated under MACRS using a 5-year recovery period. Although the existing hoist has only 3 years (years 4, 5, and 6) of depreciation remaining under MACRS, it has a remaining usable life of 5 years. Hoist A, one of the two possible replacement hoists, costs $39,500 to purchase and $8,500 to install. It has a 5-year usable life and will be depreciated under MACRS using a 5-year recovery period. The other hoist, B, costs $54,900 to purchase and $5,800 to install. It also has a 5-year usable life and will be depreciated under MACRS using a 5-year recovery period. Increased investments in net working capital will accompany the decision to acquire hoist A or hoist B. Purchase of hoist A would result in a $4,200 increase in net working capital; hoist B would result in a $5,500 increase in net working capital. The projected profits before depreciation and taxes with each alternative hoist and the existing hoist are given in the following table.
| Earning before depreciation,interest,and taxes | |||
| year | with hoist A | with hoist B | WITH EXISTING HOIST |
| 1 | 20,700 | 21,700 | 14,900 |
| 2 | 20,700 | 24,000 | 14,900 |
| 3 | 20,700 | 25,400 | 14,900 |
| 4 | 20,700 | 25,400 | 14,900 |
| 5 | 20,700 | 25,400 | 14,900 |
The existing hoist can currently be sold for $18,600 and will not incur any removal or cleanup costs. At the end of 5 years, the existing hoist can be sold to net $1,400 before taxes. Hoists A and B can be sold to net $11,500 and $21,000 before taxes, respectively, at the end of the 5-year period. The firm is subject to a 40% tax rate on both ordinary income and capital gains. (Table 3.2 on page 100 contains the applicable MACRS depreciation percentages.)
| Rounded Depreciation Percentages by Recovery Year Using MACRS for | ||||
| Percentage by recovery year* | ||||
| Recovery year | 3 years | 5 years | 7 years | 10 years |
| 1 | 33% | 20% | 14% | 10% |
| 2 | 45% | 32% | 25% | 18% |
| 3 | 15% | 19% | 18% | 14% |
| 4 | 7% | 12% | 12% | 12% |
| 5 | 12% | 9% | 9% | |
| 6 | 5% | 9% | 8% | |
| 7 | 9% | 7% | ||
| 8 | 4% | 6% | ||
| 9 | 6% | |||
| 10 | 6% | |||
| 11 | 4% | |||
| Totals | 100% | 100% | 100% | 100% |
Calculate only Hoist B (Ignore Hoist A).
a) Calculate the NPV, IRR, Payback Period and Discounted Payback Period (the cost of capital of 10%)
b)By using you own assumption or probability of occurring for new machine only (others remain unchanged), prepare a scenario analysis and recalculate the incremental operating cash inflow for year 1 to 5 associated with the proposed replacement.
Please show all the step and calculation (thank you)
