2.

Carbide Chemical Company is considering the replacement of two old machines

with a new more efficient machine, The old machine could be sold for $70,000 in the
secondary market. The depreciated book value is $120,000 with a remaining useful and
depreciable life of 8 years. Straight-line depreciation is used on these machines. The
new machine can be purchased and installed for $480,000. It has useful life of 8 years,
and at the end of which a salvage value of $40,000 is expected. The machine falls in 5-year
property class for accelerated cost recovery (depreciation) purposes. Due to its greater
efficiency , the machine is expected to result in incremental annual saving of $120,000.
The company's corporate tax rate is 34 percent, and if a loss occurs in any year on the project,
it is assumed that company will get a tax credit of 34 percent for such class. 2.a) What are the incremental cash flows
over the eight years and what is the incremental cash This Model is prepared by Rajib Dahal. If you need
flow at time 0? 2.b) What is the project's net present value If the require date of return is 14 percent? excelsheet calculation, please contact me at my email at
rajib.dahal@nu.edu.kz/rajib.dahal@gmail.com

Assumptions
Depreciated Book Value of Old Machine 120,000 Depreciation Schedule forfive-year property class
Current Salvage Value of old machine 70,000 Years Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
Capex for new machine 480000 Depreciation rate 20.00% 32.00% 19.20% 11.52% 11.52% 5.76%
Annual Depreciation-
Salvage Value of new machine 40,000 New Machine 96,000 153,600 92,160 55,296 55,296 27,648
Annual reduction in labour and maintenance cost 120,000
Discount Rate 0.14
Tax Rate 0.34

Discounted Cash Flow Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8
Years 0 1 2 3 4 5 6 7 8
Cash savings from new machine 120,000 120,000 120,000 120,000 120,000 120,000 120,000 120,000
Gain from Salvage Value of Old machine (50,000)
D&A(New Machine) 96,000 153,600 92,160 55,296 55,296 27,648 0 0
D&A(Old Machine) 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000
Increase in D&A 81,000 138,600 77,160 40,296 40,296 12,648 (15,000) (15,000)
Gain from Salvage Value of new machine 40,000
Cash savings before taxation (50,000) 39,000 (18,600) 42,840 79,704 79,704 107,352 135,000 175,000
Taxation (17,000) 13,260 (6,324) 14,566 27,099 27,099 36,500 45,900 59,500
Cash flows after taxation 25,740 (12,276) 28,274 52,605 52,605 70,852 89,100 115,500
Add: D&A (Increment) 0 81,000 138,600 77,160 40,296 40,296 12,648 (15,000) (15,000)
Add: Capex (480,000)
Transaction Cash flows (393,000) 106,740 126,324 105,434 92,901 92,901 83,500 74,100 100,500
Discount factor 1.000 0.877 0.769 0.675 0.592 0.519 0.456 0.400 0.351
Discounted Cash flow (393,000) 93,632 97,202 71,165 55,005 48,250 38,042 29,613 35,231
NPV 75,139