8. Replacement analysis Aa Aa Cold Duck Manufacturing Inc. is a company that produces iGadgets, among several other products. Suppose that Cold Duck Manufacturing Inc. considers replacing its old machine used to make iGadgets with a more efficient one, which would cost $1,700 and require $380 annually in operating costs except depreciation. After-tax salvage value of the old machine is $700, while its annual operating costs except depreciation are $1,000. Assume that, regardless of the age of the equipment, Cold Duck Manufacturing Inc.'s sales revenues are fixed at $4,500 and depreciation on the old machine is $700. Assume also that the tax rate is 40% and the project's risk-adjusted cost of capital, r, is the same as weighted average cost of capital (WACC) and equals 10%. , and they are constant over four Based on the data, net cash flows (NCFS) before replacement are years. Although Cold Duck Manufacturing Inc.'s NCFS before replacement are the same over the four-year period, its NCFS after replacement vary annually. The following table shows depreciation rates over four years. Year 1 Year 2 Year 3 Year Depreciation rates 33.33% 44.45% 14.81% 7.41% Complete the following table and calculate incremental cash flows in each year. Hint: Round your answers to the nearest dollar and remember to enter a minus sign if the calculated value is negative. Year 1 Year 2 Year 3 Year 0 Year 4 New machine cost $1,700 After-tax salvage value, old machine $700 Sales revenues $4,500 $4,500 $4,500 $4,500 $380 $380 $380 Operating costs except depreciation $380 Operating income After-tax operating income Net cash flows after replacement (adding back depreciation) Incremental Cash Flows Next evaluate the incremental flows by calculating the net present value (NPV), the internal rate of return (IRR), and the modified IRR (MIRR). Assume again that the cost of financing the new project is the same as the WACC and equals 10%. Hint: Use a spreadsheet program's functions or use a financial calculator for this task. MIRR NPV IRR Evaluation %24 8. Replacement analysis Aa Aa Cold Duck Manufacturing Inc. is a company that produces iGadgets, among several other products. Suppose that Cold Duck Manufacturing Inc. considers replacing its old machine used to make iGadgets with a more efficient one, which would cost $1,700 and require $380 annually in operating costs except depreciation. After-tax salvage value of the old machine is $700, while its annual operating costs except depreciation are $1,000. Assume that, regardless of the age of the equipment, Cold Duck Manufacturing Inc.'s sales revenues are fixed at $4,500 and depreciation on the old machine is $700. Assume also that the tax rate is 40% and the project's risk-adjusted cost of capital, r, is the same as weighted average cost of capital (WACC) and equals 10%. , and they are constant over four Based on the data, net cash flows (NCFS) before replacement are years. Although Cold Duck Manufacturing Inc.'s NCFS before replacement are the same over the four-year period, its NCFS after replacement vary annually. The following table shows depreciation rates over four years. Year 1 Year 2 Year 3 Year Depreciation rates 33.33% 44.45% 14.81% 7.41% Complete the following table and calculate incremental cash flows in each year. Hint: Round your answers to the nearest dollar and remember to enter a minus sign if the calculated value is negative. Year 1 Year 2 Year 3 Year 0 Year 4 New machine cost $1,700 After-tax salvage value, old machine $700 Sales revenues $4,500 $4,500 $4,500 $4,500 $380 $380 $380 Operating costs except depreciation $380 Operating income After-tax operating income Net cash flows after replacement (adding back depreciation) Incremental Cash Flows Next evaluate the incremental flows by calculating the net present value (NPV), the internal rate of return (IRR), and the modified IRR (MIRR). Assume again that the cost of financing the new project is the same as the WACC and equals 10%. Hint: Use a spreadsheet program's functions or use a financial calculator for this task. MIRR NPV IRR Evaluation %24