Initial outlay associated with this project

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Reference no: EM132032453

Tremont Designs is considering replacing one of its machines. The current equipment was purchased 5 years ago, and its installed cost was $225,000. At that time it was estimated to have a useful life of 10 years.

The machine is being depreciated using the simplified straight-line method and has market value today is $10,000.

The machine runs 3 shifts each day, two full-time machine operators are required to operate each shift. Each is paid a $40,000 annual salary. The existing machine creates about $20,000 worth of defects per year, and costs $5,000 per year to maintain.

The proposed machine costs $390,000, requires the company to spend $30,000 for shipping and installation. If purchased, it will be depreciated to a zero book balance using SSLD over its 5-year expected useful life.

Though the firm does not expect revenues to increase with the new machine, the newer model is more efficient and less labor intensive.

As a result only one machine operator is required on each shift, the cost of defects would drop to $8,000 per year, and maintenance would now reach $12,000 annually. Green expects to the proposed new machine to have a $64,000 market value at the end this time.

The firm's total marginal tax rate-both state and federal-is 35% and the risk adjusted discount rate of this project is 15%. With relation to the cash flows associated with this replacement, what is/are the:

A) Initial outlay associated with this project?

B) Annual after-tax cash flows associated with this project (OCFs), for years 1 through 4?

C) Total Terminal year cash flow in year 5?

Reference no: EM132032453

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