The Dauten Toy Corporation currently uses an injection molding machine that was purchased

2 years ago. This machine is being depreciated on a straight-line basis toward a $500 salvage
value, and it has 6 years of remaining life. Its current book value is $2,600, and it can be sold for
$3,000 at this time. Thus, the annual depreciation expense is ($2,600-$500)/6=$350
per year.Dauten is offered a replacement machine which has a cost of $8,000, an estimated useful
life of 6 years, and an estimated salvage value of $800. This machine falls into the MACRS
5-year class so the applicable depreciation rates are 20 percent, 32 percent, 19 percent, 12 percent,
11 percent, and 6 percent. The replacement machine would permit an output expansion,
so sales would rise by $1,000 per year; even so, the new machine’s much greater efficiency
would still cause operating expenses to decline by $1,500 per year. The new machine would
require that inventories be increased by $2,000, but accounts payable would simultaneously increase This Model is prepared by Rajib Dahal. If you need
by $500. Dauten’s marginal federal-plus-state tax rate is 40 percent, and its cost of capital excelsheet calculation, please contact me at my email at
is 15 percent. Should it replace the old machine? rajib.dahal@nu.edu.kz/rajib.dahal@gmail.com
Appendix 11B-1: Replacement Project Analysis
Assumptions
Present Book Value of Old Machine 2,600.00 Depreciation Schedule for five year property class (for tax purpose)
Current salvage value of old machine 3,000.00 20% 32% 19% 12% 11% 6%
Saving of Costs due to New Machine 2,500.00 (Note: Total Savings of Cost due to new Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
Annual depreciation of old machine 350.00 machine=rise of sales by 1000 PLUS
Salvage value of new machine after six years 800.00 decline of operating expenses by 1500)
Cost of New Machine 8,000.00 Change in WC 1,500.00 Change in WC=Increase in inventory by 2000 MINUS Increase in accounts payable by 500
Tax rate 0.40 Cost of Capital 15%
Salvage value of old machine after six years 500.00
Discounted Cash Flow Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
0 1 2 3 4 5 6
Cash savings from new machine 0 2,500 2,500 2,500 2,500 2,500 2,500
D&A(New Machine) 0 1,600 2,560 1,520 960 880 480
D&A(Old Machine) 0 350 350 350 350 350 350
Change in D&A 0 1,250 2,210 1,170 610 530 130
Salvage Value of Old Machine 3,000 0 0 0 0 0 0
Gain from Salvage Value of Old Machine 400 0 0 0 0 0 0
Salvage Value of New Machine 0 0 0 0 0 800
Gain from Salvage Value of New Machine 0 0 0 0 0 800
Loss of Salvage Value from Old Machine (500)
Cashflow before taxation 1,250 290 1,330 1,890 1,970 2,670
Taxation 160 500 116 532 756 788 1,068
Cash flows after taxation 750 174 798 1,134 1,182 1,602
Add: Change in D&A 1,250 2,210 1,170 610 530 130
Add: Capex (8,000)
Add: Change in WC (1,500) 1,500
Transaction Cashflow (6,660) 2,000 2,384 1,968 1,744 1,712 3,232
Discount Factor 1.000 0.870 0.756 0.658 0.572 0.497 0.432
DCF (6,660) 1,739 1,803 1,294 997 851 1,397
NPV 1,421 Since the NPV is positive, the company should replace the old machine.