1 answer

**REPLACEMENT ANALYSIS**

The Bigbee Bottling Company is contemplating the replacement of one of its bottling machines with a newer and more efficient one. The old machine has a book value of $575,000 and a remaining useful life of 5 years. The firm does not expect to realize any return from scrapping the old machine in 5 years, but it can sell it now to another firm in the industry for $235,000. The old machine is being depreciated by $115,000 per year, using the straight-line method.

The new machine has a purchase price of $1,175,000, an estimated useful life and MACRS class life of 5 years, and an estimated salvage value of $130,000. The applicable depreciation rates are 20%, 32%, 19%, 12%, 11%, and 6%. It is expected to economize on electric power usage, labor, and repair costs, as well as to reduce the number of defective bottles. In total, an annual savings of $225,000 will be realized if the new machine is installed. The company's marginal tax rate is 35%, and it has a 12% WACC.

- What initial cash outlay is required for the new machine? Round your answer to the nearest dollar. Negative amount should be indicated by a minus sign.

$ - Calculate the annual depreciation allowances for both machines and compute the change in the annual depreciation expense if the replacement is made. Round your answers to the nearest dollar.
Year Depreciation Allowance, New Depreciation Allowance, Old Change in Depreciation 1 $ $ $ 2 3 4 5 - What are the incremental net cash flows in Years 1 through 5? Round your answers to the nearest dollar.
**Year 1****Year 2****Year 3****Year 4****Year 5**$ $ $ $ $ - Should the firm purchase the new machine?

-Select-YesNoItem 22

Khare to read the book Replacement Analysis EPLACEMENT ANALYSIS Bebe Betting Company is contemplating the replacement of one of its bottling machines with a newer and more efficient one. The old machine has a book value of $575,000 and maining use life of 5 years. The firm does not expect to realize any return from scrapping the old machine in 5 years, but it can sell it now to another form in the industry for $225. d machine is being depreciated by $115.000 per year, using the straight line method new machine has a purchase price of $1,175,000, an estimated useful life and MACRS dass life of 5 years, and an estimated salvage value of $10,000. The applicable depreciato re 205, 10, 129, 119, and it is expected to economize an electric power usage, labor, and repair costs, as well as to reduce the number of defective bottles. In total, a avings of $225,000 wil be realized if the new machine is installed. The company's marginal tax rates 35%, and it has a 120 WACC. a. What initia cash outlay is required for the new machine Round your answer to the nearest dollar Negative amount should be indicated by a minus sign 6. Calculate the annual depreciation allowances for both machines and compute the change in the annual depreciation expense if the replacement is made. Round your answers nearest dollar Year Decreation Depreciation Change in Allowance Allowance, Did Depreciation

comwag a WAL What in tal cash outlay is required for the new machine Round your answer to the nearest dolar Negative amount should be indicated by a minus sign D. Calculate the annual depreciation allowances for both machines and compute the change in the annual depreciation expense if the replacement is made. Round yo nearest dolac Year Depreciation Depreciation Change in Allowance, Alonce, Old Depreciation c. What are the incrementalnet cash flows in Years 1 through 57 Round your answers to the nearest dollar. Year 2 Year 3 Year 4 d. Should the firm purchase the new machine? Support your answer the input in the h i ll

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