ABC Gas industries is considering a replacement of an old petroleum refining machine (model 16) acquired 4 years ago with costs of:
Purchasing price 450,000
Shipping & Handling costs 10,000
Installation cost 15,000
The new model 107 will be acquired at costs of
Purchasing price 750,000
Shipping & Handling costs 20,000
Installation cost 30,000
The new model will result in cost savings of 50,000 annually during years 1 to 4, 20,000 annually in the next 5 years and 10,000 annually during the last 2 years. The old model could be sold at his fair market value $240,000. ABC Gas industries tax rate is 36% and cost of capital is 16%.
REQUIRED
Model 16 Book Value
Gain or loss on the sale of Model 16
Tax benefit or tax obligation on the sale
Cash flow from the sale of model 16
Initial investment (net investment) in acquisition of model 107
Incremental depreciation year 2 and year 6
Total net benefits or net cash flows year 3 and year 7
Net present value of the replacement decision
Is the replacement a good decision?