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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 $9,000,000, and it will be depreciated on a straight-line basis over a period of five
years.
The old machine is also being depreciated on a straight-line basis. It has a book value of $200,000(at year 0) and three 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 5). The old machine has a current salvage
value (at year 0) of $300,000.
Replacing the old machine will require an investment in net working capital (NWC) of $60,000 that will be recovered at the end of the
project's life (year 5).
The new machine is more efficient, so the incremental increase in operating income before taxes will increase by a total of $500,000
in each of the next five years (years 1-5).(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 10%.
The company's annual tax rate is 35%.
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