REPLACEMENT ANALYSIS The Dauten Toy Corporation uses an injection molding

# Replacement analysis the dauten toy corporation uses

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REPLACEMENT ANALYSIS The Dauten Toy Corporation uses an injection molding machine that was purchased 2 years ago. This machine is being depreciated on a straight-line basis, and it has 6 years of remaining life. Its current book value is \$2,100, and it can be sold for \$2,500 at this time. Thus, the annual depreciation expense is \$2,100/6 ¼ \$350 per year. If the old machine is not replaced, it can be sold for \$500 at the end of its useful life. Dauten is offered a replacement machine that has a cost of \$8,000, an estimated useful life of 6 years, and an estimated salvage value of \$800. This machine falls into the MACRS 5-year class; so the applicable depreciation rates are 20%, 32%, 19%, 12%, 11%, and 6%. The replacement machine would permit an output expansion, so sales would rise by \$1,000 per year. Even so, the new machine’s greater efficiency would cause operating expenses to decline by \$1,500 per year. The new machine would require that inventories be increased by \$2,000, but accounts payable would simultaneously increase by \$500. Dauten’s marginal federal-plus-state tax rate is 40%, and its WACC is 15%. Should the company replace the old machine?
0 1 2 3 4 5 6 sales 1000 1000 1000 1000 1000 1000 oc -1500 -1500 -1500 -1500 -1500 -1500 depr old 350 350 350 350 350 350 depr new 1600 2560 1520 960 880 480 change in depr 1250 2210 1170 610 530 130 tax 500 #NAME? #NAME? #NAME? #NAME? #NAME? op.cashflow 2000 #NAME? #NAME? #NAME? #NAME? #NAME? inv.nowc -1500 1500 new purch. -8000 old sold 2500 tax on old -160 new sold 800 tax on new sold -320 altern. -500 tax 200 fcf -7160 2000 #NAME? #NAME? #NAME? #NAME? 3232 npv \$ 921.36
0 1 2 3 4 5 6 7 -483000 105833.9 105833.9 105833.9 105833.9 105833.9 105833.9 105833.9 \$ -
0 -483 1 0 wacc 12% 2 0 3 0 4 0 5 0 6 0 7 483 min NPV \$ (264.52) 0 -483000 12% 1 105834 GEL0.48 2 105834 3 105834 4 105834 5 105834 6 105834 7 105834

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• Fall '17
• Eter Tsigriashvili
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