Question: ABC Company is considering replacing printing equipment. The old equipment can be sold for $450,000, it has a book value of $300,000 and its remaining useful life is three years with zero expected salvage value & has been depreciated by $100,000 per year, apply the straight line method. The new equipment will cost $1,000,000. It will be depreciated by the straight line method over a four years recovery period with an expected salvage value of $150,000, & it require an increase in net working capital of $95,000. Annual saving of electricity, labor & materials from use of the new equipment is estimated at $395,000. The company is in a 35% tax bracket, & its cost of capital is 10.5%.
[A] Determine the initial outlay [cash flow]?
[B] Determine the annual cash flows?
[C] Should the new equipment be purchased?