Reference no: EM132419238

Problem: XYZ Industries is considering the following project: Buying a new machine to replace an older machine. The new machine costs $1,500,000 right now and can be sold at the end of its life in 6 years for $200,000. The old machine was purchased 7 years ago for $1,000,000 and can be sold for $300,000 today or for $100,000 in 6 years. Both, the old and the new machines have a CCA rate of 30%. XYZ Industries has just paid $110,000 for a study which indicates that the new machine will reduce annual manufacturing expenses by $400,000 per year. Since the new machine is more reliable, the plant will need to keep fewer spare parts in stock. Management expects that inventory levels can be reduced by $70,000 (at t=0) when the new machine is installed (note, at the end of the project, this change in net working capital will be reversed, i.e., inventory levels will increase again by $70,000 at the end of year 6). XYZ's marginal tax rate is 36%, and its required rate of return (RRR) is 11%.

Required:

Question 1: What is the initial cash outlay (the total cash flow at t=0)?

Question 2: What is the second year's cash flow (excluding the CCA Tax Shield)?

Question 3: What is the last year's cash flow (excluding the CCA Tax Shield)?

Question 4: What is the year 5 CCA?

Question 5: What is the PV CCA Tax Shield?

Question 6: What is the NPV of the replacement project?