Nuff Folding Box Company, Inc. is considering purchasing a new gluing machine. The gluing machine costs $50,000 and requires installation costs of $2,500. This outlay would be partially offset by the sale of an existing gluer. The existing gluer originally cost $10,000 and is four years old. It is being depreciated under MACRS using a five-year recovery schedule and can currently be sold for $15,000. The existing gluer has a remaining useful life of five years. If held until year 5, the existing machine's market value would be zero. Over its five-year life, the new machine should reduce operating costs (excluding depreciation) by $17,000 (it’s EBIDT) per year compared to the old machine. Training costs of employees who will operate the new machine will be a one-time cost of $5,000 which should be included in the initial outlay. The new machine will be depreciated under MACRS using a five-year recovery period. The firm has a 12 percent cost of capital and a 40 percent tax on ordinary income and capital gains. Please show the work.
1) The payback period when looking at the cash flow for the new project is (hint you will need to calculate the incremental operational cash flow for the new machine and the initial outlay for the new project in number 14 first)
2) The tax effect of the sale of the existing asset is:
3) The initial outlay for this new project is:
4) The present value of the new project's annual cash flows (after tax) is:
5) The net present value of the new project is (hint: take the answer for number 15 and subtract the initial outlay) :
6) The internal rate of return for the new project is: