8. Replacement analysis 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 $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, Purple Turtle Group'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, 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 same over the 4-year period, its NCFS after replacement vary annually. The following table shows depreciation rates over four years. Year 2 Year 11 Year 3 Depreciation rates. 33.33% 44.45% 14.81% Year 4 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 0 Year 1 Year 2 Year 3 Year 4 New machine cost $2,000 After-tax salvage value, old machine $400 Sales revenues $2,500 $2,500 $2,500 $280 $280 $280 Operating costs except depreciation $1,331 Operating income After-tax operating income $799 $1,154 $1.688 $1.154 andarement (adding back depreciation) $2,500 $280 $1,924 $2,072 $1,243. $1.391 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 $2,000 After-tax salvage value, old machine. $400 Sales revenues $2,500 $2,500 $2,500 $2,500 Operating costs except depreciation $280 $280 $280 $280 Operating income $ $1,331 $1,924 $2,072 After-tax operating income $ $799 $1,154 $1,243 $ $1,688 $1,154 $1,391 Net cash flows after replacement (adding back depreciation) Incremental Cash Flows $748 $510 $451 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 decision because Based on the evaluation, replacing the old equipment appears to be a
