$12-$ Assignment $-$ Cash Flow Estimation and Risk Analysis

nalysis of a replacement project

imes firms will need to decide if they want to continue to use their current equipment or replace the equipment with newer $e$ nany will need to do replacement analysis to determine which option is the best financial decision for the company.

ce Co$.$ is considering replacing an existing piece of equipment. The project involves the following:

The new equipment will have a cost of $$1,800,000,$ and it is eligible for $100\%$ bonus depreciation so it will be fully deprecia $t=0.$

The old machine was purchased before the new tax law, so it is being depreciated on a straight$-$line basis. It has a book val $$200,000($at year $0)$ and four more years of depreciation left $($ $$50,000$ per year$).$

The new equipment will have a salvage value of $$0$ at the end of the project's life $($year $6).$ The old machine has a current s: value $($at year $0)$ of $$300,000.$

Replacing the old machine will require an investment in net operating working capital $($NOWC$)$ of $$60,000$ that will be recove end of the project's life $($year $6).$

The new machine is more efficient, so the firm's incremental earnings before interest and taxes $($EBIT$)$ will increase by a tota $$500,000$ in each of the next six years $($years $1-6).$ Hint: This value represents the difference between the revenues and ope costs $($including depreciation expense$)$ generated using the new equipment and that earned using the old equipment.

The project's cost of capital is $13\%.$

The company's annual tax rate is $25\%.$

Complete the following table and compute the incremental cash flows associated with the replacement of the old equipment with the

The net present value $($NPV$)$ of this replacement project is: