5. Analysis of a replacement project Consider the case of Price Compiny: The managers of Price Company are considering replacing an existing piece of equlpment, and have collected the following information: - The new piece of equigment will have a cost of $9,000,000, and it will be depreciated on a straight-line basis over a period of five years. - The old machine is also being depreciated on a straight-line basis. It has a book value of $200,000 (at year 0 ) and three more years of depreciation left ($50,000 per year). - The new equipment will have a salvage value of 50 at the end of the project's life (year 5 ). The old machine has a current salvage value (at year D) of $300,000. - Replacing the old machine will require an investment in net working capital (NwC) of $20,000 that will be recovered at the end of the project's life (year 5 ). - The new machine is more efficient, so the incremental increase in operating income before taxes will increase by a total of $400,000 in each of the next five years (years 1-5). (Hint: This value represents the difference between the revenues and operating costs (including depreciation expense) generated using the new equipment and that earned using the old equipment.) - The project's required rate of return is 8% - The company's annual tox rate is 35%. Cempiefe the following table and compuite the incremental cosh fown assoolated with the replacement of the old equlpment with the new equament The net present velue (NPV) of this replacement project id 5. Analysis of a replacement project Consider the case of Price Compiny: The managers of Price Company are considering replacing an existing piece of equlpment, and have collected the following information: - The new piece of equigment will have a cost of $9,000,000, and it will be depreciated on a straight-line basis over a period of five years. - The old machine is also being depreciated on a straight-line basis. It has a book value of $200,000 (at year 0 ) and three more years of depreciation left ($50,000 per year). - The new equipment will have a salvage value of 50 at the end of the project's life (year 5 ). The old machine has a current salvage value (at year D) of $300,000. - Replacing the old machine will require an investment in net working capital (NwC) of $20,000 that will be recovered at the end of the project's life (year 5 ). - The new machine is more efficient, so the incremental increase in operating income before taxes will increase by a total of $400,000 in each of the next five years (years 1-5). (Hint: This value represents the difference between the revenues and operating costs (including depreciation expense) generated using the new equipment and that earned using the old equipment.) - The project's required rate of return is 8% - The company's annual tox rate is 35%. Cempiefe the following table and compuite the incremental cosh fown assoolated with the replacement of the old equlpment with the new equament The net present velue (NPV) of this replacement project id