Integrative-Determining 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.
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Earning before depreciation,interest,and taxes
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|
year
|
with hoist A
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with hoist B
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WITH EXISTING HOIST
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|
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.)
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Rounded Depreciation Percentages by Recovery Year Using MACRS for
First Four Property Classes
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|
|
|
|
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Percentage by recovery year*
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|
|
|
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Recovery year
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3 years
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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.