8. Replacement analysis Purple Turtle Group is a company that produces IGadgets, among several other products. Suppose that Purple Turtle Group considers replacing its old machine used to make IGadgets 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%. Based on the data, net cash flows (NCFS) before replacement are and they are constant over four years. Although Purple Turtle Group's NCFs before replacement are the s table shows depreciation rates over four years. $1,080 the 4-year period, its NCPs after replacement vary annually. The following $1,680 $1,800 Depreciation rates Year 1 33.33% Year 2 Year 3 44.45% 14.81% Year $480 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. Based on the data, net cash flows (NCFS) before replacement are and they are constant over four years. Although Purple Turtle Group's NCFs before replacement are the same over the 4-year period, Its NCFs after replacement vary annually. The following table shows depreciation rates over four years. Year 1 Year 2 Year 3 44.45% 14.81% Year 4 7.41% Depreciation rates 33.33% 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 0 Year 1 Year 2 Year 3 Year 4 New machine cost $1,800 After-tax salvage value, old machine $600 Sales revenues $3,500 Operating costs except depreciation $250 $3,500 $250 Operating income $ $3,500 $3,500 $250 $250 $2,450 $2,983 $3,117 $ $1,470 $1,790 $1,870 After-tax operating income Net cash flows after replacement (adding back depreciation) Incremental Cash Flows 5 $2,270 $1,790 $2,003 $ $590 $377 $323 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. 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 0 Year 1 Year 2 Year 3 Year 4 New machine cost $1,800 After-tax salvage value, old machine $600 Sales revenues $3,500 Operating costs except depreciation $250 $3,500 $250 $3,500 $250 $250 $3,500 Operating income $ $2,450 $2,983 $3,117 After-tax operating income $ $1,470 $1,790 $1,870 Net cash flows after replacement (adding back depreciation) $ $2,270 $1,790 $2,003 Incremental Cash Flows S $590 $377 $323 Next evaluate t $376.88 al cash flows by calculating the net present value (NPV), the internal rate of return (IRR), and the modified IRR (MIRR). Assume again t 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 d this task. $1576.88 $34.49 $255.1 IRR MIRR Evaluation Based on the evaluation, replacing the old equipment appears to be a decision because 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 0 Year 1 Year 2 Year 3 Year 4 New machine cost $1,800 After-tax salvage value, old machine $600 Sales revenues $3,500 Operating costs except depreciation $250 Operating income $ $3,500 $3,500 $3,500 $250 $250 $250 $2,450 $2,983 $3,117 After-tax operating income $ $1,470 $1,790 $1,870 Net cash flows after replacement (adding back depreciation) Incremental Cash Flows $ $2,270 $1,790 $2,003 $590 $377 $323 Next evaluate the incremental cash 19.33% Assume again that the cost of finand use a financial calculator for this tas culating the net present value (NPV), the internal rate of return (IRR), and the modified IRR (MIRR). w project is the same as the WACC and equals 10%. Hint: Use a spreadsheet program's functions or 15.43% 11.86% 20.41% MIRR NPV Evaluation Based on the evaluation, replacing the old equipment appears to be a decision because 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. Operating costs except depreciation Year 0 Year 1 Year 2 Year 3 Year 4 New machine cost $1,800 After-tax salvage value, old machine $500 Sales revenues $3,500 $250 $3,500 $250 $3,500 $250 $3,500. $250 $ $2,450 $2,983 $3,117 $ $ $1,470 $1,790 $1,870 $2,270 $1,790 $2,003 $590 $377 $323 Operating income After-tax operating income Net cash flows after replacement (adding back depreciation) Incremental Cash Flows Next evaluate the incremental cash flows by calculatin 2.80% Assume again that the cost of financing the new proje use a financial calculator for this task. resent value (NPV), the internal rate of return (IRR), and the modified IRR (MIRR). me as the WACC and equals 10%. Hint: Use a spreadsheet program's functions or 15.43% 20.41% 14.96% NPV IRR Evaluation Based on the evaluation, replacing the old equipment appears to be a decision because Year 0 Year 1 Year 2 Year 3 Year 4 New machine cost $1,800 After-tax salvage value, old machine $600 Sales revenues $3,500 Operating costs except depreciation $250 Operating income $ $3,500 $3,500 $250 $250 $2,450 $2,983 $3,117 $3,500 $250 After-tax operating income $ $1,470 $1,790 $1,870 Net cash flows after replacement (adding back depreciation) Incremental Cash Flows $ S $2,270 $1,790 $2,003 $590 $377 $323 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 Based on the evaluation, replacing the old equipment appears to be a decision because Year 0 Year 1 Year 2 Year 3 Year 4 New machine cost $1,800 After-tax salvage value, old machine $600 Sales revenues $3,500 Operating costs except depreciation $250 $250 Operating income $ $3,500 $3,500 $3,500 $250 $250 $2,450 $2,983 $3,117 After-tax operating income $ $1,470 $1,790 $1,870 Net cash flows after replacement (adding back depreciation) $ Incremental Cash Flows $590 $2,270 $1,790 $2,003 $377 $323 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 Evaluation the MIRR is positive the IRR is higher than WACC the IRR is positive Based on the evaluation, replacing the old equipment appears to be a decision because