CAPITAL BUDGETING CASH FLOWS培训教材.ppt

Perma-Filter Co. (Capital Budgeting Project, Machine Replacement) Perma-Filter Co. is a manufacturer of high performance automotive oil filters. The firm is considering replacing an old assembly machine with a new one. The old machine was purchased five years ago at a cost of $3 million. It has a useful remaining life of ten more years. It is currently being depreciated to a zero net book value using the straight line depreciation method over a ten-year life. It can be sold today for $1.75 million. After another ten years of use, the salvage value would be zero. A new, more efficient machine costs $5.1 million today. It will last for ten years. At the end of ten years, the firm expects to sell it for $300,000. Removal and cleanup costs are expected to be $150,000. The new machine will require total installation costs of $600,000, of which $400,000 must be capitalized with the rest to be expensed immediately. The new machine will also be depreciated using the straight line method over ten years to a net book value of $350,000. If the replacement is made, an additional investment of $40,000 in inventories will be required due to the new manufacturing technology. The purchase of this inventory will create accounts payable of $25,000. The additional investment in net working capital will be recovered at the end of ten years. Although the new machine is not expected to increase sales, its use will result in a reduction of annual cash operating expenses by $1.2 million. The firms tax rate is 40%, and no investment tax credit is currently available for this machine. Compute the incremental cash flows if the old machine is replaced by the new one today. This project has a cost of capital of 12%. Compute the project’s NPV. Perma-Filter Co. Net Present Value (NPV) calculation Time Item BTCF ATCF PV@12% 0 initial (capitalize) -5,500,000 -5,500,000 -5,500,000 0 install (expense) -200,000 -120,000 -120,000 0 working capital -15,000 -15,000