Sheila's Shoe Shop is thinking of existing shoe repair machine. The old machine was replacing their manager bought for $100,000 several years ago and is now fully depreciated. The of Sheila's believes that she can get $30,000 for the old machine today.
The new machine will cost $120,000, and will be depreciated using straight line over its useful life of five years. The new machine is expected to generate 100 more units per year. Each unit will add $ 150 to revenues and $50 to expenses.
The new machine will require an initial investment in net working capital of $10,000 . In three years, the manager expects to sell this machine for $42,000. Sheila s Shoe Shop has a tax rate of 30% and a cost of capital of 10%.
What is the annual depreciation expense for the new machine?
What is the depreciation tax shield created by the new machine?
What is the total for incremental revenues for the new machine each year?
What is the total for incremental earnings for the new machine for Year 1?
What is the incremental cash flow from the sale of the old machine?
What is the net cash flow for Year 1? What is the net cash flow at Time 0?
What is the change in working capital at Time 0?
How does the change in working capital at Time 0 affect cash flows?
What is the NPV of this project?
How would this analysis change if MACRS was used to depreciate the new machine instead of the straight line method?