Operating cash inflows and terminal cash flows

Assignment Help Financial Accounting

Reference no: EM13825926

Old Press - Originally purchased 3 years ago at an installed cost of $400,000, it is being depreciated under MACRS using a 5 year recovery period. The old press has a remaining economic lif of 5 years. It can be sold today to net $420,000 before taxes, if it is retained, it can be sold to net $150,000 before taxes at the end of 5 years.

Press A - highly automated press can be purchased for $830,000 and will require $40,000 in installation costs. It will be depreciated under MACRS using a 5-year recovery period. At the end of the 5 years, the machine could be sold to net $400,000 before taxes. If this machine is acquire, it is anticipated that the current account changes shown below

Cash +$25400

Accounts Receivable +$120,000

Inventories -$20,000

Accounts Payable +$35,000

Press B - This press is not as sophisticated as A. It costs $640,000 and requires $20,000 installation cost. It will be depreciated under MACRS using a 5 year recovery period. At the of 5 years, it can be sold to net $330,000 before taxes. Acquisition of this press will have no eggect on net working capital investment.

The firm estimates that its earning before depreciation, interest, and taxes with old press, and with press A and press b for each of the 5 years shown below. The firm has 40% tax rate. The firm's cost of capital, r, applicable to the proposed replacement is 14%.

year old press press a press b

1 $120,000 $250,000 $210,000

2 120,000 270,000 210,000

3 120,000 300,000 210,000

4 120,000 330,000 210,000

5 120,000 370,000 210,000

a. for each of the two proposed replacement presses, determine

1. initial investment

2. Operating cash inflows (depreciation in year 6)

3. Terminal cash flows

b. using the data developed in part a, find and depict on a time line revelant cash flow stream associated with each of the two proposed replacement presses, assuming that each is terminated at the end og 5 years.

c. Using the data developed in part b, apply each of the following decision techniques:

1. payback period

2. net present value

3. internal rate of return

d. draw net present value profiles for the two repacement presses on the same set of axes, and discuss conflict ranking of the two presses, if any, resulting from use of NPV and IRR decision techniques.

e. Recommend which, if either, of the presses the firm should acquire if the firm has 1. unlimited funds or 2. capital rationing

f. the operating cash inflows associated with press A are characterized as very risky in contrast to the low risk operating cash inflows of press B. What impact does that have on your recommendation?

Reference no: EM13825926

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