The ABD company is considering replacing the latex molding machine it uses to fabricate rubber boots with a newer, more efficient model. The old machine has a book value of $450,000 and a remaining useful life of 5 years. ABD can sell it now to another firm $153,000. The old machine is being depreciated on a straight line basis over the next 5 years to a zero salvage value. If used for three more years, it should sell for $50,000. The new machine has a purchase price of $775,000. An additional $25,000 would be spent in shipping and installation. The machine is expected to have a market value of $250,000 in three years. In addition, a consultant was paid $15,000 to estimate the cost benefits, future market value and identify the best manufacturer of this replacement machine. The machine is classified as a 5 year class MACRS asset for depreciation purposes. The applicable depreciation rates are: 20%, 32%, 19.2%, 11.52%, 11.52% and 5.76% respectively. The new machine is not only more efficient, requiring less electricity, labor and repair costs, reducing expenses by $80,000 per year, but most important it can produce different colored boots that are expected to increase sales by $120,000 a year.
This project is expected to last only 3 more years. The firm’s marginal tax rate is 40% and its WACC is 12%. (use the back of the first page if you need more room too).
Two other coworkers have already calculated the NPVs for the other states of nature’ (scenarios). Scenario A has a 40% chance of occurring and a NPV of $50,000. Scenario B has a 25% chance of occurring and has a NPV of $75,000. You are calculating Scenario C and justifying the final decision to accept or reject this investment project. Please show steps. I am not finding or understanding the revenue expenses or fixed costs