Question

Green Moose Industries is a company that produces iBooks, among several other products. Suppose that Green Moose Industries considers replacing its old machine used to make iBooks with a more efficient one, which would cost $1,800 and require $250 annually in operating costs except depreciation. After-tax salvage value of the old machine is $600, while its annual operating costs except depreciation are $1,100. Assume that, regardless of the age of the equipment, Green Moose Industries’s sales revenues are fixed at $3,500 and depreciation on the old machine is $600. Assume also that the tax rate is 40% and the project’s risk-adjusted cost of capital, r, is the same as weighted average cost of capital (WACC) and equals 10%.

Based on the data, net cash flows (NCFs) before replacement are___________ and they are constant over four years.

Answer 1

Answer:

Based on the data, net cash flows (NCFs) before replacement are $1,680 and they are constant over four years.

Explanation:

annual operating costs before replacement = $1,100

sales revenue = $3,500

depreciation of old machine = $600

tax rate = 40%

net cash flow = [(revenues - current cost - depreciation) x (1 - tax rate)] + depreciation = [($3,500 - $1,100 - $600) x (1 - 40%)] + $600 = $1,680 per year