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Analysis of a replacement project times firms will need to decide if they want to continue to use their current equipment or replace the equipment

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Analysis of a replacement project times firms will need to decide if they want to continue to use their current equipment or replace the equipment with newer equipment. The ompany will need to do replacement analysis to determine which option is the best financial decision for the company. Price Co, is considering replacing an existing piece of equipment. The project involves the following: - The new equipment will haye a cost of 5600,000 , and it is eligible for 100% bonus depreciation so it will be fully depreciated at t=0. - The old machine was purchased before the new tax law, so it is being depreciated on a straight-line basis. It has a book value of $200,000 (at year 0) and four more years of deprecation left {$50,000 per year). - The new equipment will have a salvage value of 50 at the end of the project's life (year 6 ). The old machine has a current salvage value (at vear 0 ) of $300,000. - Replacing the old machine will require an investment in net operating working capital (NowC) of $45,000 that will be recovered at the end of the project's afe (year 6). - The new machine is more efficlent, so the firm's incremental earnings before interest and tases (Eeit) will increase by a total of $500,000 in each of the next six years (years 1-6). Hint: This value represents the difference between the revenues and operating costs (induding debrecision erpense) penerated using the new tquipment and that earned using the old equiament. - The prolect's cont of capital in 13\%. - The compani's anhual tak rate is 25% complete the following table and compute the incremental cash flows associated with the replacement of the old equipment with the new equipment. Year0InbialYear15600,000%Year2Year ifvestment ERIT - Takes 8 Desrediation T + Salvage value wTrx Ten salvage - rowe Aecaptore of Nowc: Toeal free cath fow The not prosert value timing of the reoiacechent project in: (8) 1,103,711 5) 85,757,481 Q.51:172,414 3) 2+32+.231

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