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BioFarm Inc. wants to replace its current equipment with new high-tech equipment. The existing equipment was purchased 4 years ago at a cost of $120,000.
BioFarm Inc. wants to replace its current equipment with new high-tech equipment. The existing equipment was purchased 4 years ago at a cost of $120,000. At that time, the equipment had an expected life of 10 years, with no expected salvages value. The equipment is being depreciated on a straight-line basis. Currently, the market value of the old equipment is $44, 400. The new equipment can be bought for $175, 200, including installation. Over its 10-years life, it will, reduce operating expenses from $193, 900 for the first six years, and from $206, 800 to $190, 800 for the last four years. Net working capital requirements will also increases by $20, 200 at the time of replaceable. It is estimated that the company can sell the new equipment for $24, 800 at the end of its life. Since the new equipment's cash flows are relationally certain, the project's cost of capital is set at 90%, compared with 15% for an average-risk project. The firm's maximum acceptable payback period is 5 years
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