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2. PT PLN Indonesia Bangka is considering purchasing a new diesel power plant. The diesel power plant costs $50,000 and requires installation costs of $2,500.
2. PT PLN Indonesia Bangka is considering purchasing a new diesel power plant. The diesel power plant costs $50,000 and requires installation costs of $2,500. This outlay would be partially offset by the sale of an existing power plant. The existing power plant originally cost $10,000 and is four years old. It is being depreciated under MACRS using a five-year recovery schedule and can currently be sold for $15,000 The existing power plant has a remaining useful life of five years. If held until year 5, the existing power plant's market value would be zero. The new power plant should reduce operating costs (excluding depreciation) by $17,000 per year, over its five-year life. There is training costs which should be included in the initial outlay for employees who will operate the new machine and it is a one-time cost of $5,000. The new power plant will be depreciated under MACRS using a five-year recovery period. The firm has a 12 percent cost of capital and a 40 percent tax on ordinary income and capital gains. Based on these information, as a financial consultant: a. Calculate the initial investment cash flows b. Calculate the operating cash flows e. Calculate the incremental cash flows d. Calculate PBP, NPV and IRR of the project e. What is your suggestion for PT PLN based on your findings
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