Biotec Inc. wants to replace its R&D equipment with new high-tech equipment. The existing equipment was purchased

Question:

Biotec Inc. wants to replace its R&D equipment with new high-tech equipment. The existing equipment was purchased five years ago at a cost of $150,000. At that time, the equipment had an expected life of 10 years, with no expected salvage value. The equipment is being depreciated on a straight-line basis. Currently, the old equipment's market value is $75,000.

The new equipment can be bought for $200,000, including installation. Over its 10-year life, it will reduce raw material usage and overhead, and as a result R&D costs will decrease from $179,000 to $158,000 for the first six years and from $144,000 to $105,200 for the last four years. Net working capital requirements will also increase by $25,000 at the time of replacement.

It is estimated that the new equipment can be sold for $50,000 at the end of its life. Since the new equipment's cash flows are relatively certain, the project's cost of capital is set at 10%, compared with 15% for an average-risk project. The firm's maximum acceptable payback period is five years.

Instructions

(a) Calculate the initial investment amount.

(b) Calculate the project's cash payback period.

(d) State whether or not the company should replace the old R&D equipment with the new high-tech equipment. Justify your answer.

Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of... Payback Period
Payback period method is a traditional method/ approach of capital budgeting. It is the simple and widely used quantitative method of Investment evaluation. Payback period is typically used to evaluate projects or investments before undergoing them,...