As the capital budgeting director of Union Mills Inc. you are analyzing the replacement of an automated loom system.

The old system was purchased 5

years ago for $200,000; it falls into the MACRS 5-year class; and it has 5 years of remaining life and a $50,000 salvage value five years from now. The
current market value of the old system is $100,000. The new system has a price of $300,000, plus an additional $50,000 in installation costs. The new This problem is taken from "Study Guide for Brigham/Houston's
system falls into the MACRS 5-year class, has a 5-year economic life, and a $100,000 salvage value. The new system will require a $40,000 increase in Fundamentals of Financial Management, 13th Edition, 2012
the spare parts inventory. The primary advantage of the new system is that it will decrease operating costs by $40,000 per year. Union Mills has a 12 by Eugene F. Brigham and Joel F. Houston". This Model is prepared by
percent cost of capital and a marginal tax rate of 35 percent. What is the net cash investment at Year 0? What is the annual net operating cash inflow in Rajib Dahal. If you need excelsheet calculation, please contact me at my
Year 1? What is the net cash flow in the final year (Year 5)? email at rajib.dahal@nu.edu.kz/rajib.dahal@gmail.com
Chapter-11: Solutions
Assumptions
Cost of Old System(5 years ago) 200,000.00 Depreciation Schedule
Salvage Value(at the end of next 5 years) 50,000.00 Years Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

Price of New System(incld. Installation costs) 350,000.00 Rate of Depreciation 20% 32% 19% 12% 11% 6%
Salvage Value of new system (at the end of next 5
years) 100,000.00 Old System 40,000.00 64,000.00 38,000.00 24,000.00 22,000.00 12,000.00
Increase in Inventory 40,000.00 New System 70,000.00 112,000.00 66,500.00 42,000.00 38,500.00 21,000.00
Annual Saving of Operating Costs by new system 40,000.00
Tax Rate 0.35
Discount Rate 0.12
Salvage Value of Old System(today) 100,000.00
Discounted Cash Flow Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Terminal Value@Year 5
0 1 2 3 4 5 Terminal Value@Year 5
Incremental revenue 40,000 40,000 40,000 40,000 40,000
D&A(New) 70,000 112,000 66,500 42,000 38,500
D&A(Old) 12,000 0 0 0 0
D&A(Increment) 58,000 112,000 66,500 42,000 38,500
Salvage Value of Old system 100,000 (50,000)
Salvage Value of New system 100,000
Gain from Salvage Value 88,000
Cashflow before taxation 88,000 (18,000) (72,000) (26,500) (2,000) 1,500
Taxation 30,800 (6,300) (25,200) (9,275) (700) 525 10,150
Cash flows after taxation (11,700) (46,800) (17,225) (1,300) 975
Add:D&A 58,000 112,000 66,500 42,000 38,500
Add: Capex (350,000)
Add: Change in Net Working Capital/Inventory (40,000) 40,000
Transaction Cashflow (320,800) 46,300 65,200 49,275 40,700 39,475 79,850
Discount Factor 1.000 0.893 0.797 0.712 0.636 0.567 0.567
DCF (320,800) 41,339 51,977 35,073 25,866 22,399 45,309
NPV (98,837)

So, the answers are:(Shown in bold in our computation)

What is the net cash investment at Year 0? (320,800)
What is the annual net operating cash inflow in Year 1? 46,300
What is the net cash flow in the final year (Year 5)? 119,325 Hint: Add 39475 and 79850