6) National Geographic is replacing an old printing press with a new one. The old press is
being sold for $350,000 and it has a net book value of $75,000. Assume that National
Geographic is in the 40% income tax bracket. How much will National Geographic pay in
income taxes from the sale?
A) $140,000
B) $45,000
C) $110,000
D) $87,010
Question Status: Previous edition
Objective: 12.4 Calculate the incremental cash lows for replacement type investments.
Keywords: replacement investment
Principles: Principle 3: Cash Flows Are the Source of Value
7) The relevant depreciation expense for a replacement investment is the diference
between depreciation on the new asset(s) and the old asset(s).
Question Status: New question
Objective: 12.4 Calculate the incremental cash lows for replacement type investments.
Keywords: replacement investment
Principles: Principle 3: Cash Flows Are the Source of Value
8) The salvage value of equipment should not be considered when replacing it with new
equipment.
Question Status: New question
Objective: 12.4 Calculate the incremental cash lows for replacement type investments.
Keywords: replacement investment
Principles: Principle 3: Cash Flows Are the Source of Value
9) When replacing old assets with new assets, it is safe to assume that working capital
requirements will remain the same.
Question Status: New question
Objective: 12.4 Calculate the incremental cash lows for replacement type investments.
Keywords: replacement investment
Principles: Principle 3: Cash Flows Are the Source of Value
37
10) The original cost and expected life of old assets are critical considerations in
replacement decisions.
Question Status: New question
Objective: 12.4 Calculate the incremental cash lows for replacement type investments.
Keywords: replacement investment
Principles: Principle 3: Cash Flows Are the Source of Value
11) Taxes may have a signiicant efect on the cost of replacing an old asset with a new
asset.
Question Status: New question
Objective: 12.4 Calculate the incremental cash lows for replacement type investments.
Keywords: replacement investment
Principles: Principle 3: Cash Flows Are the Source of Value
12) Krugman Construction Company is considering the purchase of a new crane at a cost of
$600,000. If the new crane is purchased the old crane will sold. It was purchased 5 years
ago at a cost of $450,000. To date, the company has taken $200,000 in depreciation on the
old crane. Compute the cash low that would be realized from selling the old crane under
each of the following scenarios. Krugman’s marginal tax rate is 30%.
a. The crane is sold for $200,000
b. The crane is sold for $250,000
c. The crane is sold for $300,000
Question Status: Previous edition
Objective: 12.4 Calculate the incremental cash lows for replacement type investments.
Keywords: replacement investment
Principles: Principle 3: Cash Flows Are the Source of Value
38
13) Kahnemann Kookies is evaluating the replacement of an old oven with a new, more
energy eicient model. The old oven cost $50,000, is 5 years old and is being depreciated
over a life of 10 years to a value of $0.00. The new oven costs $60,000 and will be
depreciated over 5 years with no salvage value. Kahnemann uses straight line depreciation,
its tax rate is 40%. If the old oven is sold for $10,000, compute the net cost of the new
oven.
Question Status: Previous edition
Objective: 12.4 Calculate the incremental cash lows for replacement type investments.
Keywords: replacement investment
Principles: Principle 3: Cash Flows Are the Source of Value
14) Kahnemann Kookies is evaluating the replacement of an old oven with a new, more
energy eicient model. The old oven cost $50,000, is 5 years old and is being depreciated
over a life of 10 years to a value of $0.00. The new oven costs $60,000 and will be
depreciated over 5 years with no salvage value. Kahnemann uses straight line depreciation,
its tax rate is 40%. Compute:
a. the change in annual depreciation that would result from purchasing the new machine.
b. the change in taxes each year that would result from purchasing the new machine.
Question Status: Previous edition
Objective: 12.4 Calculate the incremental cash lows for replacement type investments.
Keywords: replacement investment
Principles: Principle 3: Cash Flows Are the Source of Value
39
15) Bull Gator Industries is considering a new assembly line costing $6,000,000. The
assembly line will be fully depreciated by the simpliied straight line method over its 5 year
depreciable life. Operating costs of the new machine are expected to be $1,100,000 per
year. The existing assembly line has 5 years remaining before it will be fully depreciated
and has a book value of $3,000,000. If sold today the company would receive $2,400,000
for the existing machine. Annual operating costs on the existing machine are $2,100,000
per year. Bull Gator is in the 46 percent marginal tax bracket and has a required rate of
return of 12 percent.
a. Calculate the net present value of replacing the existing machine.
b. Explain the impact on NPV of the following:
i. Required rate of return increases
ii. Operating costs of new machine are increased
iii. Existing machine sold for less
40
Question Status: Previous edition
Objective: 12.4 Calculate the incremental cash lows for replacement type investments.
Keywords: replacement investment
Principles: Principle 3: Cash Flows Are the Source of Value
41