8.

8. Analysis of a replacement project At times firms will need to decide if they want to continue to use their current equipment or replace the equipment with newer equipment. The company will need to do replacoment analyses to determine which option is the best financial decision for the company. Price Co, is considering replacing an existing piece of equipment, The project involves the following: - The new equipment will have a cost of $600,000, and it will be depreciated on a straight-line basis ever a period of six years (years: 1-6). - The cid machine is abo being depreciated on a straight-ine basis, It has a book value of $200,000 (at year 0 ) and four more years of depreciation lett ($50,000 per year). - The necr equipinent will have a ealvage value of to at the end of the project's iff (year 6 ). The old machine has a current salvege: value (at year 0 ) of $300,000. - Replacing the ald machine will rrquire an investanent in net working capital (CwC) of $60,000 that will be recovered at the end of the project's Ma (year 6 ). - The new machine is more efficent, so the firm'sincomental earmings before interest and taxes (CBm) will increase by a total of \$400,000 in each of the nect aic years (years 1-6), Hints this value represents the difference between the revenues and operoting costs (Gaduding deprodation expense) generated ueing the new cquipment and that earned using the old equipment. - The projoct's wast of capital 1313%. - The company's annual tax rate is as\%. tomplete the following table and compute the incremental cash flows associated with the replecement of the old equipment with the new equipment. The net present value (WrV) of this replacement project ia: $975,199 $913,252 (5761,043)