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A factory is considering replacing its existing coining press with a newer, more efficient one. The existing press was purchased 4 years ago for $400000 and is being depreciated according to a 7-year MACRS depreciation schedule. The factory’s CFO estimates that the existing press has 5 years of useful life remaining. The new press’s purchase price is $560000. Installation of the new press would cost an additional $40000; this installation cost would be added to the depreciable base (i.e., it would be capitalized) and then depreciated across time. The new press (if purchased) would be depreciated using the 7-year MACRS schedule although the factory will retire or sell the new press af- ter 5 years. Interest expenses associated with the purchase of the new press are estimated to be roughly $8000 per year for the next 5 years. If the new press is purchased, revenues will remain the same as they’d be if the old press is maintained. However, the appeal of the new press is that it is estimated to reduce production costs by $162000/year for the next 5 years. Also, if the new press is purchased, the old press can be sold for $60000 today. The CFO believes that the new press would be sold for $90000 in 5 years. NWC would not be affected. The company has a marginal tax rate of 34.0%. The cost of capital (i.e., the required rate of return) for this project is 7.5%. Calculate the incremental cash flows for this replacement decision, for time 0, for each year of operation, and at termination. Please make sure that you show clear work as to determine how you arrived at your incremental cash flows! [Hint: The old press’s net book val. at t=0 is $124960. Hint: I want to remove any doubts surrounding the depreciation schedule for the old machine. Yes, if kept in place, the existing machine will reach a book value of $0 before the ma- chine is retired.] [Note: Normally, you would then use these cash flows to calculate NPV and IRR of the incremental decision to either (1) buy the new press and sell the old one or (2) keep the old press. Next, you would make a conclusion about whether or not the existing coining press should be replaced at this time. However, this assignment already contains an adequate number of other NPV and IRR calculations.]
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