Georgia Energy is contemplating replacing an oil powered generator with a solar powered generator. The old generator

Question:

Georgia Energy is contemplating replacing an oil powered generator with a solar powered generator. The old generator was purchased twenty two years ago and is being depreciated over its 25 year life to a zero using straight-line depreciation. The old generator has a book value of $4.5 million but could be sold today for $3.0 million. The solar powered generator would cost $10 million and be depreciated over a 4 year life using MACRS (.33,.45,.15,.07). Do to the rapidly changing technology it is anticipated that the new generator will be sold after three years for $1.0 million. The new generator is expected to save Georgia Energy $10 million a year during its 3-year life. Georgia Energy will need to increase working capital by $1.5 million. The company's WACC is 10% and the tax rate is 35%. What is the project's (NPV)? Should the oil powered generator be replaced?
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...