Use the information provided below on Ford Motor Company to answer the following four parts:
Ford Motor Company (F) is considering replacing an old automated assembly line with a new one that will cost $200,000. Delivery charges on the new machine are expected to be $5,000, while installation/modification charges are anticipated to be $10,000. The new machine is expected to increase annual before-tax revenues by $75,000 and fixed costs by $10,000. The replacement machine will be depreciated using MACRS 3-year class (33%, 45%, 15%, 7%), and could be sold after 3 years for $30,000. The old assembly line still has two years of depreciation left ($5,000 per year) and can be sold today for $10,000. The firm's WACC is 10%, and its marginal tax rate is 40%.
a) What is the initial cash outflow for the replacement project?
- $200,000
- $215,000
- $210,000
- $205,000
- None of the above
b) What is the depreciation outlay in the first year?
- $70,950
- $5,000
- $65,950
- $91,750
- None of the above
c) What is the operating cash flow in the third and final year?
- $51,900
- $75,920
- $75,700
- $65,000
- None of the above
d) What is the net present value (NPV) and should the company replace the old assembly machine?
- $44,008.41, Accept
- $25,961.83, Accept
- $-44,008.41, Reject
- $-25,961.83, Reject
- None of the above