Question: A) Co Q is considering replacing an old machine that was purchased five years ago at a cost of $400,000. It is being depreciated on a straight line basis to a zero salvage value over an original ten year life. It has a current market value of $150,000. The new machine will cost $200,000 and will last five years at which time it will have a salvage value of $20,000. It is in the three year ACRS class (rates are 33, 45, 15, 7). The machine will not change sales but will reduce expenses by $35,000 per year. Net working capital will increase $8,000 if the new machine is purchased. The tax rate is 40%. Set up the cash flows for each period.
B) You are considering the replacement of a machine which has a current book value of $55,000 and market value of $62,000. The machine is expected to last another 4 years, at which time it could be sold for its book value of $15,000. Depreciation is $10,000 per year. The new machine will cost $100,000 and will last four years, at which time it can be sold for $30,000. The machine is in the 3-years MACRS class (rates are .33, .45, .15, .07). The new machine will not change sales but will reduce operating expenses by $50,000 each year. The firms tax rate is 40%. The new machine will also require an increase in net working capital of $4,000. Show the cash flows for each year.