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8. Replacement analysis Aa Aa E Purple Turtle Group is a company that produces iBooks, among several other products. Suppose that Purple Turtle Group considers
8. Replacement analysis Aa Aa E Purple Turtle Group is a company that produces iBooks, among several other products. Suppose that Purple Turtle Group considers replacing its old machine used to make iBooks with a more efficient one, which would cost $1,800 and require $250 annually in operating costs except depreciation. After-tax salvage value of the old machine is $600, while its annual operating costs except depreciation are $1,100. Assume that, regardless of the age of the equipment, Purple Turtle Group's sales revenues are fixed at $3,500 and depreciation on the old machine is $600. 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 Purple Turtle Group'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 33.33% 44.45% Year 3 Year 4 14.81% 7.41% Depreciation rates
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