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B Company is considering replacing an existing processor with a new one that costs $220,00

B Company is considering replacing an existing processor with a new one that costs $220,00

B Company is considering replacing an existing processor with a new one that costs $220,000. Shipping and setup costs for the new processor are estimated.to be $13,000. B Company's working capital is expected to increase by $17,000 when the new processor begins operation and is expected to be fully recoverable at the end of the project. The new processor's useful life is expected to be 5 years and its salvage value at that point is estimated to be $49,100. The old processor had an installed cost of $150,000 when it was placed in service three years ago and is being depreciated to a zero book value using a 5 year ACRS life. The processor can be sold today for $26,300. The increase in revenues and before tax cash operating expenses for the new processor compared to continuing with the old processor are shown in the table below. B Company has a marginal tax rate of 34% and a cost of capital of 11%.

Year

Incremental Revenues

Incremental Cash Operating Expenses

ACRS Depr. %

1

$82,000

$25,000

15

2

$77,000

$23,000

22

3

$88,000

$29,000

21

4

$89,000

$23,000

21

5

$88,000

$26,000

21

Fill in the Blanks:

The initial investment for the project is $__________.

The initial investment for the project is $__________.

Incremental depreciation expense for year 2 in the life of the new processor is $__________.

Incremental depreciation expense for year 2 in the life of the new processor is $__________.

After tax salvage value of the new processor at the end of year 5 is $__________.

Operating cash flow after tax (OCFAT) for year 5 of the life of the new processor is $__________.

NPV of the project is $__________.

 
Abhinav 03-Dec-2019

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