Karen Feasey, the Plant Manager of Industrial Coatings, is trying to decide whether to replace the old coatings machine with a new computerized machine. Her executive assistant gathers the following information:Company Assumptions: New Machine Assumptions: Cost of (includes shipping and installation): $150,000 Salvage value at end of year 5: $35,000 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 $15,000 and will increase current liabilities by $10,000 Impact on Operating Cash Flows Years 1- 5 (includes depreciation and taxes): $28,000 (assume equal amount each year for simplicity)
Old Machine Assumptions:
During the process of making the decision whether or not to replace the old machine, Feasey calculates the initial cash outlay as approximately:
The initial investment outlay is calculated as follows:
cost of new machine + proceeds/loss from old machine + change in net working capital (NWC) = -$150,000 + $25,000 - $4,000 - $5,000 = -$134,000 (cash outflow)Details of calculation: Sales price = $25,000 inflow Tax/tax credit: $4,000 outflow = (Sales price – book value)*(tax rate) = (25,000 – 15,000)*0.4 Δ NWC = Δ current assets - Δ current liabilities = 15,000 – 10,000 = 5,000 |