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ABC Gas industries is considering a replacement of an old petroleum refining machine (model 16) acquired 4 years ago with costs of:
ABC Gas industries is considering a replacement of an old petroleum refining machine (model 16) acquired 4 years ago with costs of:
Purchasing price 450,000
Shipping & Handling costs 10,000
Installation cost 15,000
The new model 107 will be acquired at costs of
Purchasing price 750,000
Shipping & Handling costs 20,000
Installation cost 30,000
The new model will result in cost savings of 50,000 annually during years 1 to 4, 20,000 annually in the next 5 years and 10,000 annually during the last 2 years. The old model could be sold at his fair market value $240,000. ABC Gas industries tax rate is 36% and cost of capital is 16%.
REQUIRED
a. Total net benefits or net cash flows year 3 and year 7
b. Net present value of the replacement decision
