Your firm is considering replacing a machine that originally cost $250,000 with a new machine costing $290,000. It will also cost $10,000 to install the new machine. The new machine has a much higher output and would increase sales by $100,000 each year. The new machine is also more efficient and will save $15,000 in operating costs annually. The new machine would take more floor space causing the firm to cease leasing a portion of it plant at $20,000 per year. The new machine will be depreciated under the three year MACRS class over a three-year project life. The new equipment will increase inventories by $8,000 and increase accounts payable by $15,000.
The old equipment being replaced can be sold today for $50,000. The old machine was being depreciated using MACRS three year life and had been used for only 2 years.
Other important information for your decision is as follows. The firm’s tax rate is 25%. The firm’s cost of capital is 8%. At the end of the three-year use of the new equipment, the equipment can be sold for $30,000. What are the project’s cash flows?
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