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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
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.
LoRusso Co is considering replacing an existing piece of equipment. The project involves the following:
The new equipment will have a cost of $ and it is eligible for bonus depreciation so it will be fully depreciated at t
The old machine was purchased before the new tax law, so it is being depreciated on a straightline basis. It has a book value of $at year and four more years of depreciation left $ per year
The new equipment will have a salvage value of $ at the end of the project's life year The old machine has a current salvage value at year of $
Replacing the old machine will require an investment in net operating working capital NOWC of $ that will be recovered at the end of the project's life year
The new machine is more efficient, so the firms incremental earnings before interest and taxes EBIT will increase by a total of $ in each of the next six years years 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
The company's annual tax rate is Complete the following table and compute the incremental cash flows associated with the replacement of the old equipment with the new equipment.
The net present value NPV of this replacement project is:
$
$
$
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