4. Analysis of a replacement project At times firms will need to deade if they want to continue to use their current equipment or replace the equipment with newer equipment. The company will need to do replacement analysis to determine which option is the best financiat decision for the company. Price Co. is considering replacing an existing pioce of equipment. The project involves the following: - The new equipment will hove a cost of $2,400,000, and it is eligible for 100% borus deprecation so it will be fully depreciated at t=0 - The old machine was purchased before the new tax law, so it is being depreciated on a straghr-line basis. It has a book value of $200,000 (at year 0) and four more years of depreciatien left ( $50,000 per year). - The new equipment will have a salvage value of 50 at the end of the profect's life (year 6 ). The old machine has a current salvage valise (at year 0) of $300,000. - Replacing the old machine will require an investment in net operating working capitai (Nowc) of $50,000 that will be recovered at the end of the project's life (yeitr 6). - The new machine is more efficient, so the firm's incremental earnings before interest and taxes (E8IT) will increase by a total of $500,000 in each of the next sox years (years 16 ). Hint: This value represents the difference betwecn the revenues and operatha 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 Hows associated with the replacemenk of the old equipment with the new equipment Ch 12- Assignment-Cash Flow Estimation and Risk Analysis Complete the following table and compute the incremental cash flows assocated with the replacement of the old cquipment with the new equipenent. The wiet present value (NPV) of this replacement project is: .589,084 The net present value (NPV) of this replacement project is: $89,084$75,721$102,447$106,901 4. Analysis of a replacement project At times firms will need to deade if they want to continue to use their current equipment or replace the equipment with newer equipment. The company will need to do replacement analysis to determine which option is the best financiat decision for the company. Price Co. is considering replacing an existing pioce of equipment. The project involves the following: - The new equipment will hove a cost of $2,400,000, and it is eligible for 100% borus deprecation so it will be fully depreciated at t=0 - The old machine was purchased before the new tax law, so it is being depreciated on a straghr-line basis. It has a book value of $200,000 (at year 0) and four more years of depreciatien left ( $50,000 per year). - The new equipment will have a salvage value of 50 at the end of the profect's life (year 6 ). The old machine has a current salvage valise (at year 0) of $300,000. - Replacing the old machine will require an investment in net operating working capitai (Nowc) of $50,000 that will be recovered at the end of the project's life (yeitr 6). - The new machine is more efficient, so the firm's incremental earnings before interest and taxes (E8IT) will increase by a total of $500,000 in each of the next sox years (years 16 ). Hint: This value represents the difference betwecn the revenues and operatha 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 Hows associated with the replacemenk of the old equipment with the new equipment Ch 12- Assignment-Cash Flow Estimation and Risk Analysis Complete the following table and compute the incremental cash flows assocated with the replacement of the old cquipment with the new equipenent. The wiet present value (NPV) of this replacement project is: .589,084 The net present value (NPV) of this replacement project is: $89,084$75,721$102,447$106,901