Reference no: EM131800621

Problem

You are given the following information for a replacement project for machines. Each machine currently in use has a net book value of $1 million, and would continue to be depreciated on a straight-line basis to a net book value of zero over the next 5 years. The plant engineer estimates that the old machines could be used for as many as 10 more years. The purchase price for the new machines is $5 million apiece, which would be depreciated over a 10-year period on a straight-line basis to a net book value of $500,000 each. Each new machine is expected to produce a pretax operating savings of $1.5 million per year over the machine it would replace. You estimate that you could sell the old machines for $250,000 each. Installation of each new machine would be expected to cost $600,000 in addition to the purchase price. Of this amount $500,000 would be capitalized in the same way as the purchase price, and the remaining $100,000 would be expensed immediately. The increases in inventory and accounts payable cause a required increase in net working capital of ΔW = $20,000. Answer the below questions.

(1) What is the initial cash investment for the new equipment?
(2) The sale of the machine currently in use would have two effects on future cash flows.