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 replacement analysis to determine which option is the best financial decision for the company LoRusso Co. is considering replacing an existing piece of equipment. The project involves the following .The new equipment will have a cost of $9,000,000, and it will be depreciated on a straight-line basis over a period of six years (years 1-6). The old machine is also being depreciated on a straight-line basis. It has a book value of $200,000 (at year 0) and four more years of depreciation left ($50,000 per year) * The new equipment will have a salvage value of 0 at the end of the project's life (year 6). The old machine has a current salvage value (at year 0) of *Replacing the old machine will require an investment in net working capital (NWC) of $50,000 that will be recovered at the end of the project's life (year * The new machine is more efficient, so the firm's incremental earnings before interest and taxes (EBIT) will increase by a total of $400,000 in each of the $300,000 6) next six years (years 1-6). 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 cost of capital is 13%. * The company's annual tax rate is 35%. Complete the following table and compute the incremental cash flows associated with the replacement of the old equipment with the new equipment. Year o Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Initial investment EBIT - Taxes + New depreciation - Old depreciation + Salvage value - Tax on salvage - NWC + Recapture of NWC Total free cash flow $400,000 show these answers in excel spreadsheet 1, 760,000 The net present value (NPV) of this replacement project is 1 AO -$1,592,917 BO -$1,874,020 -$2,248,824 -$2,155,123 3. The international monetary system Until August 1971, industrialized countries around the world maintained a fixed exchange rate of their currencies with the U.S. dollar, which was linked to gold. The gold standardized system was called the Bretton Woods Fixed Exchange Rate System. This system collapsed in 1971, and since then, the dollar has not been linked to gold Based on your understanding of the international monetary system, complete the following statements A L exchange rate is the quoted price for a unit of foreign currency to be delivered within a very short period of time 1. A, B, C, D 2. Spot, Forward 3. Pegged, Floating 4. Appreciation, Depreciation 5. Depreciation or Appreciation, Devaluation or Revaluation 6. Freely, Managed 7. Soft, Hard The government does not set a exchange rate, which means that supply and demand in the market determine the currency's value When American customers import more from Europe than they export to Europe, the euro4 relative to the dollar 5 The exchange value of a floating currency of a currency refers to a decrease or increase, respectively, in the foreign Under a floating regime, supply and demand for the currency determine the exchange rate Currencies under such a regime are called7 currencies
