At times firms wil need to deode of they want to continue to use their carrent equipment or reptace the equiprnent with neme Price Co, is considerng replacing an existing piece of equipment, The project imvolves the following: - The new equipment wil have a cost of $1,800,000, and is wil be depreciated on a straipht-Ine basis over a penod of six years irears 16). - The pld machine is also being depreciated on a straight-line basis, 1t has a book value of $200,000 (at year 0 ) and four more vears of depreciation left ( 550,000 per rear). - The new equipment will have a salvage value of $0 at the end of the project's He (year 6 ). The old machine has a current salvapt value (at year 0 ) of $300,000. - Replacing the old machine will require an investment in net workang capital (NwC) of s60,000 that wal be nicovered at ine end of ithe project's life (year 6 ). - The new machine is more efficent, so the fim's ncremental earnings before interest and taxes (Earr) wil nciease by a fotal at $400,000 in each of the next sax years (Years 1 -6). Hint: This value represents the dfference between the revenues and operal ny costs (including depreciation expense) generated using the new equpment and that eamed usmg the old equoment * The project's cost of capital is 13% - The company's annual tax rate is 35%. Complete the following table and compute the incremental cash flows associated with the replacement of the old equipment with the now equipent. Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 investment $1,800,000 V - Tax on salvage - NWC Recapture at NWC Yotal fiee ceshfor Year 0 Year 1 Year 2 Year 3 Year 4 Years $1,800,000 stment reciation \begin{tabular}{|c|} \hline$140,000 \\ \hline$87,500 \\ $1,800,000 \\ $400,000 \\ \hline \end{tabular} on rear 2 Year 3 Year 4 Year tment kes eciation $400,000 $1,800,000 $140,000 $35,000 capture NWC tal free Complete the following table and compute the incremental cash flows associated with the reptacement of the old equipment wah the new equpment. Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 $1,800,000 $1,800,000 Year 2 Year 3 Year 1 Year 5 Year 2 Year 3 Year 4 Year 5 $1,800,000 Year 3 Year 4 Years ment ces eciation NWC ecapture +NWC otalitee anth flow $1,800,000 Year 3 Year 4 Year 5 v \begin{tabular}{l} \hline 365,000 \\ 140,000 \\ 35,000 \\ -60000 \\ 87,500 \\ \hline \end{tabular} rear 2 1 rea n - Ye 4 vv rear 3 Year 4 Year 5 Year 1 Year 2 Year 3 Year 4 Year 5 Year 3 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 $1,800,000 The net present value (NPV) of this replacement project is: $135,259$182,997 The net present value (NPY) of this replacement project is 3135,2595182,9973159,1265190,954 The net present value (NPV) of this replacement project is: 5135,2595182,9975159,128 the net piesent y 90,954 net present vahue (NPV) of this replocement project is: $135,259$182,997$159,128$100,954 (NPV) of this replacement project is: The net present value (NPV) of this replacement project is: $135,259$182,997$159,128$190,954
