The Boyd Bottling Company is contemplating the replacement of one of its bottling machines with a newer and more efficient one. The old machine was originally purchased three years ago for $1,372,000 and has been depreciated using the MACRS schedule for a 7-years class asset and it has 5 years of useful life remaining. 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 new machine has a purchase price of $1,175,000, an estimated useful life and MACRS class life of 5 years, and an estimated market (salvage) value of $145,000 at the end of 5 years. It is expected to economize on electric power usage, labor, and repair costs, which will save Boyd $230,000 each year. In addition, it is expected the new machine will reduce the number of defective bottles, which will save an additional $25,000 annually. The company’s tax rate is 40 percent and it has a 12 percent required rate of return.a.Calculate the Depreciation Schedules for both pieces of equipment and calculate the incremental change in depreciation expense.b.What is the initial investment at t=0?c.Since the project has an economic life of only 5 years, calculate the incremental operating cash flows for years 1-5.d.What is the terminal value at the end of year 5?i.Calculate the payback period and decide whether to accept or reject.ii.Calculate the net present value and decide whether to accept or reject.ii.Calculate the internal rate of return and decide whether to accept or reject.iii.Calculate the profitability index and decide whether to accept or reject.iv.Calculate the modified internal rate of return and decide whether to accept or reject.
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