A firm is trying to determine whether to replace an existing asset. The proposed asset has a purchase price of $50,000 and has installation costs of $3,000. The asset will be depreciated over its five year life using the straight-line method.
The new asset is expected to increase sales by $17,000 and non-depreciation expenses by $2,000 annually over the life of the asset. Due to the increase in sales, the firm expects an increase in working capital during the asset's life of $1,500, and the firm expects to be able to sell the asset for $6,000 at the end of its life.
The existing asset was originally purchased three years ago for $25,000, has a remaining life of five years, and is being depreciated using the straight-line method. The expected salvage value at the end of the asset's life (i.e., five years from now) is $5,000; however, the current sale price of the existing asset is $20,000, and its current book value is $15,625.
The firm's marginal tax rate is 34 percent and its required rate of return is 12 percent.
If the new machine is purchased, depreciation expense will increase or decrease by
A) increase $8,000.
B) increase $6,900.
C) increase $6,300.
D) decrease $5,000.
Increased taxes on the sale of the old machine are
A) $1,487.50.
B) $2,500.50.
C) $3,823.50.
D) $4,312.50.
If the new machine is purchased, operating cash flow for years 1 through 5 will increase or decrease by how much?
A) Increase $15,000
B) Decrease $9,900
C) Increase $12,142
D) Increase $5,346
What would cause the initial cash outlay of an investment decision to be affected by the sale of an existing asset?
A) If the investment decision is a replacement decision
B) If the asset being purchased is technologically superior
C) If the asset being sold has exceeded its MACR's recovery allowance period
D) All of the above
