- Existing machine was purchased 2 years ago at a cost of $3,200.It is being depreciated straight line over its 8 year life. It canbe sold now for $3,000 or used for 6 more years at which time itwill be sold for an estimated $500. It provides revenue of $5,000annually and cash operating costs of $2,000 annually. A replacementmachine can be purchased now for $7,800. It would be used for 6years, and depreciated straight line. It will result in additionalsales revenue of $1,500 annually, but because of its increasedefficiency it would reduce cash operating costs by $600 per year.The new machine would require additional inventories of $700, andaccounts receivable would increase by $300. Its expected salvagevalue in 6 years is $2,000.
The tax rate is 40% and the required rate of return is 13%.Should the old machine be replaced?
a. Calculate the incremental cash flow at time 0 (ie the initialcost of this replacement project). [5marks]
b. Calculate the incremental annual operating cash flows thatresult from the new machine. [5marks]
c. Calculate the incremental terminal cash flow. [5marks]
