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Consider the case of Jones Company: The net present value ( NPV ) of this replacement project is The managers of Jones Company are considering
Consider the case of Jones Company: The net present value NPV of this replacement project is
The managers of Jones Company are considering replacing an existing piece of equipment, and have collected the following information:
The new piece of equipment will have a cost of $ and it will be depreciated on a straightline basis over a period of five
years.
The old machine is also being depreciated on a straightline basis. It has a book value of $at year and three 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 working capital NWC of $ that will be recovered at the end of the
project's life year
The new machine is more efficient, so the incremental increase in operating income before taxes will increase by a total of $
in each of the next five 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 required rate of return is
The company's annual tax rate is
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