# Relevant Cashflow Hbs

Submitted By sumitkumar39
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Homework on Relevant Cash Flow Calculations: (20 Points)
Question 1: A Mini-case on Estimation of Cash Flows (8 Points)
A firm is considering replacing an old machine at a cost of \$110,000. The new machine will to last five years with zero salvage value. It will generate expected annual cost savings of \$30,000. The current machine will last for another 10 years. The discount rate is 10 percent. Assume that tax rate is zero and the present machine is fully depreciated with a zero salvage value.

A. Should the firm replace the old machine? Show NPV calculations. (2 Points)
| | |T=0 |T=1 |T=2 |T=3 |T=4 |T=5 |
|1 |Cash Flow |(110,000) | \$ 30,000 | \$ 30,000 | \$ 30,000 | \$ 30,000 | \$ 30,000 |
|3 |NPV |3,721 | | | | | |

B. Assume that existing equipment was bought for \$80,000 five years ago and is being depreciated on a straight line over ten years towards a zero book value. It continues to have zero salvage value. Should the firm replace the machine? (No calculations are necessary). Limit your answer to 20 words or less. (2 Points)

As tax rate is Zero hence the Loss of Depreciation (Tax Shield) of Old machine and the tax shield due to Depreciation on New machine have no effect of the relevant cash inflow related to project. Decision relating to replacement will still be the same

C. The firm replaces the old machine with new machine. Two years later, an improved machine becomes available which makes the “existing” machine obsolete with no salvage value. The improved machine will cost \$150,000 and last five years. The annual additional cost savings over the previous machine is expected to be...

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