The Division of the Culver Company, a profitable, diversified manufacturing firm, purchased a machine five years ago at a cost of $10,000. The machine had an expected life of 10 years at time of purchase and a zero estimated salvage value at the end of the 10 years. It is being depreciated on a straight-line basis and has a book value of $5,000 at present. The division manager reports that he can buy a new machine for $15,000 (including installation) which, over its 15 year life, will expand sales from $10,000 to $11,000 a year. Further, it will reduce labor and raw materials usage sufficiently to cut operating costs from $7,000 to $5,000. The old machine's current market value is $1,000. Taxes are at a 6% rate and are paid annually. The ACRS class life of the new machine is five years with corresponding recovery deduction percentages of 15%, 22%, 21%, 21%, and 21%. The firm's cost of capital is 15%. Should Culver buy the new machine?
1. Calculate the actual incremental cash inflows over for the first 5 years.
2. Determine the actual cash outlay attributable to the new investment.
3. Determine the present value of the incremental cash flows and whether the net present value is positive.
4. Calculate the Net Present Value of the following cash flows at 12% per annum.
Time Zero -11,000
End of Yr One 1,000
End of yr Two 2,000
End of Yr Three 3,000
End of Yr Four 5,000
End of Yr Five 6,000