Develop incremental cash flows for replacement decision

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Reference no: EM131075714

A small factory is considering replacing its existing coining press with a newer, more efficient one. The existing press was purchased three years ago at a cost of $210,000, and it is being depreciated according to a 7-year MACRs depreciation schedule. The CFO estimates that the existing press has 5 years of useful life remaining. The purchase price for the new press is $305,000. The installation of the new press would cost an additional $35,000, and this cost would be added to the depreciable base. The new press (if purchased) would be depreciated using the 7-year MACRs depreciation schedule. Interest expenses associated with the purchase of the new press are estimated to be roughly $6,900 per year for the next 5 years. The appeal of the new press is that it is estimated to produce a pre-tax operating cost savings of $69,000 per year for the next 5 years. Also, if the new press is purchased, the old press can be sold for $40,000 today. The CFO believes that the new press would be sold for $45,000 at the end of its 5-year useful life. Assume that NWC would not be affected. The company has an average tax rate of 29% and a marginal tax rate of 33%. The cost of capital (i.e., discount rate) for this project is 10%.

Develop the incremental cash flows for this replacement decision and use them to calculate NPV and IRR.

Reference no: EM131075714

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Develop incremental cash flows for replacement decision : A small factory is considering replacing its existing coining press with a newer, more efficient one. The existing press was purchased three years ago at a cost of $210,000, and it is being depreciated according to a 7-year MACRs depreciation schedul..

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