Q8. Given the following information, what is the initial cash outflow?

A)   -$10,000.

B)   -$3,000.

C)   -$7,000.

Q9. Erwin DeLavall, the Plant Manager of Patch Grove Cabinets, is trying to decide whether or not to replace the old manual lathe machine with a new computerized lathe. He thinks the new machine will add value, but is not sure how to quantify his opinion. He asks his colleague, Terri Wharten, for advice. Wharten‘s son just happens to be a Level II CFA candidate. DeLavall and Wharten provide the following information to Wharten’s son:

Company Assumptions:

• Tax rate: 40%
• Weighted average cost of capital (WACC): 13%

New Machine Assumptions:

• Cost of (includes shipping and installation): $90,000
• Salvage value at end of year 5: $15,000
• Depreciation Schedule: MACRS 7-year, with depreciation rates in years 1-5 of 14%, 25%, 17%, 13%, and 9%, respectively
• Purchase will initially increase current assets by $20,000 and will increase current liabilities by $25,000
• Impact on Operating Cash Flows Years 1- 5 (includes depreciation and taxes): $16,800 (assume equal amount each year for simplicity)

Old Machine Assumptions:

• Current Value: $30,000
• Book value: $13,000

Which of the following choices is most correct? Patch Grove Cabinets should:

A)   replace the old lathe with the new lathe because the new one will add $10,316 to the firm's value.

B)   not replace the old lathe with the new lathe because the new one will decrease the firm's value by $5,370.

C)   replace the old lathe with the new lathe because the new one will add $3,760 to the firm's value.

H

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