Speedy Auto Wash is contemplating the purchase of a new high-speed washer to replace the existing…

Speedy Auto Wash is contemplating the purchase of a new
high-speed washer to replace the existing…

Speedy Auto Wash is contemplating the purchase of a new
high-speed washer to replace the existing washer. The existing washer was
purchased two years ago at an installed cost of $120,000; it was being
depreciated under MACRS using a 5-year recovery period. The existing washer is
expected to have a usable life of five more years. The new washer costs
$210,000 and requires $10,000 in installation costs; it has a 5-year usable
life and would be depreciated under MACRS using a 5-year recovery period. The
existing washer can currently be sold for $140,000 without incurring any
removal or cleanup costs. To support the increased business resulting from
purchase of the new washer, accounts receivable would increase by $80,000,
inventories by $60,000, and accounts payable by $116,000. At the end of five
years, the existing washer is expected to have a market value of zero; the new
washer could be sold to net $58,000 after removal and cleanup costs and before
taxes. The firm pays taxes at a rate of 40% on both ordinary income and capital
gains. The estimated profits before depreciation and taxes over the five years,
for both the new and the existing washer, are shown in the following table.

Year

Profits before Depreciation
and Taxes

New Washer

Existing Washer

1

$86,000

$52,000

2

86,000

48,000

3

86,000

44,000

4

86,000

40,000

5

86,000

36,000

a. Calculate the
initial cash outflow associated with the replacement of the existing washer
with the new one.
b. Determine the incremental cash flows associated
with the proposed washer replacement. Be sure to consider the depreciation in
year 6.
c. Determine the terminal cash flow expected at
the end of year 5 from the proposed washer replacement.
d. Depict on a time line, depict the relevant cash
flows associated with the proposed washer replacement decision.

Speedy Auto Wash is contemplating the purchase of a new
high-speed washer to replace the existing…

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