At times firms will need to decide if they want to continue to use their current equipment or replace the equipment with newer equipment. The company 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 have a cost of $1,200,000, 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 depreciation left ($50,000 per year).
	The new equipment will have a salvage value of $0 at the end of the project's life (year 6). The old machine has a current salvage value (at year 0) of $300,000.
	Replacing the old machine will require an investment in net operating working capital (NOWC) of $60,000 that will be recovered at the end of the project's life (year 6).
	The new machine is more efficient, so the firms incremental earnings before interest and taxes (EBIT) will increase by a total of $600,000 in each of the next six years (years 16). Hint: This value represents the difference between the revenues and operating costs (including depreciation expense) generated using the new equipment and that earned using the old equipment.
	The project's cost of capital is 13%.
	The company's annual tax 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.

	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6
Initial investment
EBIT
Taxes
Depreciation T
+ Salvage value
Tax on salvage
NOWC
+ Recapture of NOWC
Total free cash flow

The net present value (NPV) of this replacement project is:

$1,105,536

$829,152

$1,326,643

$1,271,366

cemparly will fied to de riphiocemene amalysis to detirmine which aptian is the best financial decisien for the cempariy- Frice co. is curbidering replacing an axisting pise of aquipmen. The project invelves the follawing: L=0 - The eld machine mas purchased befure the niw tas law, so it is being depreciatid on a straicht-lrite basis. It harh a beuk value of 5200,000 (at year 0) and four mise yairs of depreciation left (550,000 per yair ) - The fiew auipmert mill have a salvage value of $0 at the ind of the project's life frear 6). The eld machine harh a currint salvage value (al yair o) af $300,600. end of the project's life (year 6). $600,000 in each of the rwal six years (years 1-6). Himt: This value riprosents the difference boswewn the revvenues and eperatinc cests (inclucing depreciaticin expense) cerwitated usinc the new eupment and that earriwd usitic the ald ecuipmint. - The project's cest of capilal is 133n. - The cempariy's annual lax rate is 25 ha. The rut prisent value (NF) if this riplacement projict is: $1,105,536 $820,152 $1,326,643 $1,271,366