4. Analysis of a replacement project At times firms nill need to decide if they want to continue to use their current equipment or teplace the equipment with newer equipment. The compary will need to do replacement analysis to deterrmine which option is the best financial decision for the company. Price co. is considering replacing an existing piece of equigment. The project involves the following: - The new equipment will have a cost of $600,000, and it is elligible for 100% bonus depreciation se it wilt be fully depreciated at t=0. - The old machine was purchased before the new tax law, so it it being depreciated on a straight-line basis. It has a book value of 5200,000 (at year 0 ) and four mare vears of depreciation left (550,000 per year). - The new equipment wall have a salvage value of so at the end of the projects fife (Year 6 ). The ald machine has a current salvage value (at year o) of $300,000. - Replocing the old mochine will require an investment in net aperating working capital (NowC) of 360,000 that wirf be recovered at the end of the profect's ife (yest 6 ). - The now machine is more efhcient, so the firmt incremental earnings before interest and taxes (terr) will increase by a total of $700,000 in each of the next six years (years 16 ). Hint: This value represents the differance between the revenues and operating costa (uncluding depreciation expense) generated using the new equipment and that earned using the old equipment. + The project's cost of capital is 13%. - The company/e annual tax rote is 25%. Complefe the following table snd compute the incrementai cash ficws atsociated with the replacement of the old equipment with the new equipment. The net present velue (terV) of this replacement profect as: 51,055,352 11,577,049