ANSWER QUICKLY A firm is considering replacing an old piece of machinery which has a book value of $$20,000$ and $4$ years of remaining life. The machine will be depreciated using the straight$-$line method if kept. It would have no salvage value at the end of its useful life if kept. The old machine could be sold today for $$30,000.$

A replacement machine will cost $$100,000,$ an additional $$50,000$ to be delivered and installed. The new machine has an estimated life of $4$ years, will be depreciated fully with the straight$-$line method over $4$ years. It will have $$50,000$ salvage value at the end of its useful life. The new machine will increase the firm's annual sales by $$23,000$ and reduce annual operating costs by $$7,500.$ To support the greater sales, the new machine would require an increase in NOWC of $$2,500.$

The firm is in the $25\%$ tax bracket, and its WACC is $10\%.$ Should the firm replace the old machine?

a$)$ What is the project's cash flow in year $0,$ i$.$e$.$ CFo? $($Hint: this is a replacement project, don't forget the After$-$tax Salvage Value of the old machine!$)(4$ pts$)$

einvested equ

al equity:

$1$

$=$ CFo $+$

R$)$E $=$ CFo $+$

IRR:

FV $11$

$=(1+$

EV Inflo

V Outf!

b$)$ What is the incremental depreciation tax shield in year $1$ if the old machine is replaced? $(4$ pts$)$

c$)$ What is the project's cash flow in year $1,$ i$.$e$.$ CF$1?(4$ pts$)$

d$)$ What is the project's terminal cash flow, i$.$e$.$ CF$4?.($Hint: do not forget about terminal cash flow adjustments:

ANOWC reversal, ATSVnev,$+-4,$ as well as ATSVoidt$-($SO here though$)$ as an opportunity cost$)(4$ pts$)$