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Capital Budgeting for a new computerized assembly line

Propose to launch a new computerized assembly line, which costs $5,000,000, for replacing the existing assembly line. If replace the existing assembly line would result in a before-tax reduction of cash expenses by $1,200,000 per year.

The new assembly line will be fully depreciated by the simplified straight-line method over its five-year depreciable life. It is estimated that the new assembly line will be valueless in five years.

The existing assembly line has five years remaining before it will be fully depreciated and has a book value of $769,680.

If sold today, the company would also receive $769,680 for the existing machine. However, it is estimated that the existing assembly line will be valueless in five years.
If marginal tax bracket is 17% and has a required rate of return of 15%.

1. Before analysing whether B&M's Company should pay for the new assembly line, please determine which of the following items are incremental cash flows that should be incorporated into a NPV calculation. Please explain:
 the purchase price of the existing assembly line, $1,200,000, ten years ago;
 The cost of research, $23,000, for evaluating different models of the required assembly line.
2. What is the initial outlay associated with this project?
3. What are the annual after-tax cash flows associated with this project, for years 1 through 4 and the terminal cash flow in year 5?
4. Please advise whether your company should launch the new assembly line.

Solution Preview

Capital Budgeting
Propose to launch a new computerized assembly line, which costs $5,000,000, for replacing the existing assembly line. If replace the existing assembly line would result in a before-tax reduction of cash expenses by $1,200,000 per year.

The new assembly line will be fully depreciated by the simplified straight-line method over its five-year depreciable life. It is estimated that the new assembly line will be valueless in five years.

The existing assembly line has five years remaining before it will be fully depreciated and has a book value of $769,680.

If ...

Solution Summary

This solution is comprised of a detailed explanation and calculation to answer as to whether the company should replace the new computerized assembly line.

$2.19