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Describe Capital budgeting decision based on net present value
XYZ Company is considering replacing a printing machine. The old machine can be sold for $450,000, it has a book value of $300,000 and its remaining useful life is 3 years with zero expected salvage value and has been depreciated by $100,000 per year, using the straight line method. The new machine will cost $1,000,000. It will be depreciated by the straight line method over a 4-years recovery period with an expected salvage value of $150,000, and it require an increase in net working capital of $95,000. Annual saving of electricity, labor and materials from use of the new machine is estimated at $395,000. The company is in a 35 percent tax bracket, and its cost of capital is 10.5 percent.
a. What is the initial outlay (cash flow)?
b. What are the annual cash flows?
c. Should the new machine be purchased?
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