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