What is initial cash outflow for the replacement project

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Reference no: EM132012677

Ford Motor Company (F) is considering replacing an old automated assembly line with a new one that will cost $200,000. Delivery charges on the new machine are expected to be $5,000, while installation/modification charges are anticipated to be $10,000. The new machine is expected to increase annual before-tax revenues by $75,000 and fixed costs by $10,000. The replacement machine will be depreciated using MACRS 3-year class (33%, 45%, 15%, 7%), and could be sold after 3 years for $30,000. The old assembly line still has two years of depreciation left ($5,000 per year) and can be sold today for $10,000. The firm’s WACC is 10%, and its marginal tax rate is 40%.

a) What is the initial cash outflow for the replacement project?

-$200,000

-$215,000

-$210,000

-$205,000

None of the above

b) What is the depreciation outlay in the first year?

$70,950

$5,000

$65,950

$91,750

None of the above

c) What is the operating cash flow in the third and final year?

$51,900

$75,920

$75,700

$65,000

None of the above

d) What is the net present value (NPV) and should the company replace the old assembly machine?

44,008.41, Accept

$25,961.83, Accept

-$44,008.41, Reject

-$25,961.83, Reject

None of the above

Reference no: EM132012677

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