Taylor Toy Corp. (11-9)

Taylor Toy Corp. is considering the replacement of it injection molding machine. It is 2 years old but new technology has it considering the newest model.

• The old (current) machine was acquired 2 years ago and is being depreciated on a straight line basis over 8 years (6 years remaining).The annual depreciation expense is $350 per year, and its current book value is $2,100. It can be sold for $2,500 today. If the machine is not replaced, it is expected to be sold for $500 at the end of its remaining life (6 yrs).
• The new, replacement machine will cost $8,000. It is expected to be used for 6 years, and is expected to be sold for $800 then. It will be depreciated using MACRS (5-year class with 1⁄2 year convention).
• The new machine is expected to support an increase in sales by $1,000 per year, and with its improved electrical efficiency, it should reduce operating expenses by $1,500 per year.
• Inventories will need to increase by $2,000 and Account payable will increase by $500.
• The company's tax rate is 40%.
• Taylor Toy's Cost of Capital is 15%, which is the appropriate Hurdle Rate for this project.
• Using a blank workbook, evaluated this project:
• Present the cash flows
• Calculate the evaluation measures.
• Should Cookeville Technical Productions replace the machine?