8. Replacement analysis Green Moose Industries is a company that produces IGadgets, among several other products. Suppose that Green Moose Industries considers replacing its old machine used to make iGadgets with a more efficient one, which would cost $2,000 and require $280 annually in operating costs except depreciation. After-tax salvage value of the old machine is $400, while its annual operating costs except depreciation are $1,200. Assume that, regardless of the age of the equipment, Green Moose Industries's sales revenues are fixed at $2,500 and depreciation on the old machine is $400. Assume also that the tax rate is 40% and the project's risk-adjusted cost of capital, F, is the same as weighted average cost of capital (WACC) and equals 10% Based on the data, net cash flows (NCFS) before replacement are and they are constant over four years. $540 Although Green Moose Industries's NCFs before replacement are following table shows depreciation rates over four years. over the 4-year period, its NCFs after replacement vary annually. The $940 $900 Year 2 Year 1 33.33% Yeal $140 Year 3 14,81% Depreciation rates 44.45% 7.414 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 4 New machine cost Aftersalaseid mashine Year o $2,000 $400 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 4 Year o $2,000 New machine cost Alter-tax salvage value, old machine $400 $2,500 $2,500 $2,500 $280 $280 $2,500 $280 $1,331 $799 $280 $1,924 Sales revenues Operating costs except depreciation Operating income After-tax operating Income Net cash flows after replacement (adding back depreciation) Incremental Cash Flows $ $2,072 $1,243 $ $1,154 $ $1,688 $1,154 $510 $1,391 $451 $ $748 Next evaluate the incremental cash 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 o spreadsheet program's functions or use a financial calculator for this task. the NPV is positive NPV IRR MIRR Evaluation the MIRR is lower than the IRR the NPV is sman Based on the evaluation, replacing the old equipment appears to be a decision because Grade It Now Save & Continue Continue without saving Ch 13. Assignment 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 4 Year o $2,000 $400 $2,500 $2,500 $2,500 $280 $280 $280 New machine cost After-tax salvage value, old machine Sales revenues Operating costs except depreciation Operating Income After-tax operating income Net cash flows after replacement (adding back depreciation) Incremental Cash Flows $1,924 $2,500 $280 $1,331 $799 $1,688 $748 $2,072 $1,243 $1,391 $ $1,354 $ $1,154 $510 $451 ory Next evaluate the incremental cash 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. NPV IRR MIRR bad Evaluation good decision because Based on the evaluation, replacing the old equipment appears to be a Grade It Now Save & Continue Continue without saving 13: Assignment - Capital Budgeting: Estimating Cash Although Green Mose industries LTS verore replacement are the same over the year perico, INCIS arter replacement vary annuair following table shows depreciation rates over four years. Year 1 33.33% Year 2 44.45% Year 3 14.81% Year 4 7.41% Depreciation rates Complete the following table and calculate incremental cash flows in each year. Hint: Round your answers to the nearest dollar and rememb enter a minus sign if the calculated value is negative. Year 1 Year 2 Year 3 Year 4 Year o $2,000 $400 $2,500 $2,500 $2.500 $280 New machine cost After-tax salvage value, old machine Sales revenues Operating costs except depreciation Operating income After-tax operating income Net cash flows after replacement (adding back depreciation) Incremental Cash Flows $2,500 $280 $1,331 $280 $280 $2,072 $ $1,924 $1,154 $1,243 5 $ 5799 $1,688 $1,391 $1,154 5510 $ $ $745 $451 Next evaluate the incremental cash flows by calculating the net present value (NPV), the internal rate of return (IRR), and the modified IRR (MIF Assume again that the cast of financing the new project is the same as the WACC and equals 10%. Hint: Use a spreadsheet program's functions use a financial calculate for this task. NPV IRR MIRR bad Evaluation good MacBook Pro .. A & ) 3 $ 4 % 5 6 7 8 9 0