Study Guide for Brigham/Houston's Fundamentals of Financial Management, 13th Edition, Eugene F. Brigham & Joel F.

Houston
Chapter 14-Ch. 14: Cash Flow Estimation 11-13.El: 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 $600,000 and 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 $265,000. The old machineis being depreciated toward a zero salvage
value, or by $120,000 per year using the straight line method. The new machine can be purchased for $1,175,000, an
estimated useful life and MACRS class life of 5 years, and an estimated salvage value of $145,000. MACRS 5-year class
rates:20%, 32%, 19%, 12%, 11%, 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: $255,000 will be realized if the new This Model is prepared by Rajib Dahal. If you need excelsheet calculation,
machine is installed. The company's marginal tax rate is 35% and it has a 12% cost of capital. Should the firm purchase please contact me at my email at
the new machine? rajib.dahal@nu.edu.kz/rajib.dahal@gmail.com
Study Guide for Brigham/Houston's Fundamentals of Financial Management, 13th Edition, Eugene F. Brigham & Joel F. Houston
Assumptions
Cost of new bottling machine 1,175,000.00 Depreciation Schedule for five year property class (for tax purpose)
Annual depreciation of old bottling machine 120,000.00 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
Book Value of old bottling machine 600,000.00 20.00% 32.00% 19.00% 12.00% 11.00% 6.00%
Salvage Value of old bottling machine(today) 265,000.00 235,000.00 376,000.00 223,250.00 141,000.00 129,250.00 70,500.00
Salvage Value of new bottling machine(after 5 years) 145,000.00
Annual revenue increment(from new bottling machine) 255,000.00
Tax Rate 35%
Cost of Capital 12%
Discounted Cash Flow Initial Cash Outlay Year 1 Year 2 Year 3 Year 4 Year 5 Terminal Value at Year 5
0 1 2 3 4 5 5
Cash savings from new machine 255,000 255,000 255,000 255,000 255,000
D&A(New) 235,000 376,000 223,250 141,000 129,250
D&A(old) 120,000 120,000 120,000 120,000 120,000
Change in D&A 115,000 256,000 103,250 21,000 9,250
Salvage Value 265,000 145,000.00
Gain from Salvage Value (335,000) 74,500.00
Cashflow before taxation (335,000) 140,000 (1,000) 151,750 234,000 245,750
Taxation (117,250) 49,000 (350) 53,113 81,900 86,013 26,075.00
Cash flows after taxation 91,000 (650) 98,638 152,100 159,738 118,925.00
Add: Change in D&A 115,000 256,000 103,250 21,000 9,250
Add: Capex (1,175,000)
Transaction Cash flows (792,750) 206,000 255,350 201,888 173,100 168,988 118,925.00
Discount Factor 1.0000 0.8929 0.7972 0.7118 0.6355 0.5674 0.5674
Discounted Cash Flow (792,750) 183,929 203,563 143,700 110,008 95,888 67,481
NPV 11,819 Since the NPV is positive, it should buy the new bottling machine.