Ask Question, Ask an Expert

+1-415-315-9853

info@mywordsolution.com

Ask Basic Finance Expert

problem: A firm is considering the buy of a new equipment to replace the one that is currently in use. It has gathered the following data on each of these equipments:

The equipment currently in use was originally purchased two years ago for dollar 40,000. It is being depreciated under the modified accelerated cost recovery system [MACRS] using a five year recovery period, and has three years of usable life remaining. The current equipment can be sold today to net $42,000 after removal & cleanup costs. However, in 3 years [at the end of three year] the market value of the old equipment will be zero. The firm's earnings before depreciation, interest & taxes [EBDIT] are expected to be dollar 70,000 for each of the next three years if the old equipment is kept in use. 

The new equipment can be purchased at a price of $140,000 & requires $10,000 to install. It has a three year usable life & will be depreciated under the MACRS using a three year recovery period. If the new equipment is acquired, the investment in accounts receivable will be expected to rise by $10,000, the inventory investment will increase by $25,000, & accounts payable will increase by $15,000. At the end of three years, the new equipment could be sold to net $35,000 before taxes. Earnings before depreciation, interest & taxes (EBDIT) are expected to be as follows with the new equipment:

 Year

EBDIT

1

$120,000

2

$130,000

3

$130,000

The firm is subject to a 40% tax rate.

[A] Determine the initial investment associated with the proposed replacement decision.

[B] Compute the incremental operating cash inflows for Years 1 to 4 associated with the proposed replacement. [Note: Only depreciation cash flows must be considered in Year 4].

[D] Compute the terminal cash flow associated with the proposed replacement decision. [Note: This is at the end of Year 3].

[E] Depict on a time line the relevant cash flows found in parts a, b, & c that are associated with the proposed replacement decision, assuming it is terminated at the end of Year 3. 

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M918510

Have any Question? 


Related Questions in Basic Finance

1 discuss the form of calculating risk for an investment

1. Discuss the form of calculating risk for an investment. Include the reference, from where you obtained the information. 2. Why companies pay dividends?

Why should capital budgeting for projects in an overseas

Why should capital budgeting for projects in an overseas subsidiary be assessed from the parent's perspective rather than just the subsidiary's cash flow perspective? What additional factors deserve consideration in mult ...

For each of the following situations determine whether a

For each of the following situations, determine whether a long or short hedge is appropriate. Justify your answers. a. A firm anticipates issuing stock in three months. b. An investor plans to buy a bond in 30 days. c. A ...

1 what communications media have traditionally been used to

1. What communications media have traditionally been used to communicate disaster information? 2. Name several types of new media, and describe how they have been used in recent years in communicating disaster informatio ...

1 explain how the gold standard worked and why it led to

1. Explain how the gold standard worked and why it led to stable exchange rates. What might be some advantages and disadvantages of returning to the gold standard? 2. Describe the relationship between purchasing power pa ...

As a percentage of yield whats the minimum and maximum

As a percentage of yield what's the minimum and maximum tensile stress to be seen by a production quantity of these bolts? With the estimated minimum in-service tensile stress in mind, what possible bolt or joint failure ...

1 discuss how the interrupted time series design with a

1. Discuss how the interrupted time series design with a reversal and the interrupted time series design with multiple replications improve on the simple interrupted time series design. 2. Distinguish between a longitudi ...

What is meant by the term prevailing torque what do we

What is meant by the term prevailing torque? What do we mean by the terms initial preload and residual preload? Why do they differ? What limits the usefulness of the so-called, long-form torque-preload equation? Explain ...

What is an excess reserve and how is this different than

What is an excess reserve and how is this different than required reserves ? List at least four different types of insurance companies ? What is the difference between a mutual fund and a closed-end fund? If a mutual fun ...

1 why do researchers want the error variance in their data

1. Why do researchers want the error variance in their data to be small? 2. Why do researchers use meta-analysis?

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

Section onea in an atwood machine suppose two objects of

SECTION ONE (a) In an Atwood Machine, suppose two objects of unequal mass are hung vertically over a frictionless

Part 1you work in hr for a company that operates a factory

Part 1: You work in HR for a company that operates a factory manufacturing fiberglass. There are several hundred empl

Details on advanced accounting paperthis paper is intended

DETAILS ON ADVANCED ACCOUNTING PAPER This paper is intended for students to apply the theoretical knowledge around ac

Create a provider database and related reports and queries

Create a provider database and related reports and queries to capture contact information for potential PC component pro

Describe what you learned about the impact of economic

Describe what you learned about the impact of economic, social, and demographic trends affecting the US labor environmen