equipment with newer equipment. rms will need to decide if they want to continue to use their current equipment or replace the 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 will be depreciated on The old machine is also being depreciated on a straight-line basis. It has a book value of $200,000 (at 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 O) of a straight-line basis over a period of six years (years 1-6). and four more years of depreciation left ($50,000 per year). $300,000. Replacing the old machine will require an investment in net working capital (NWC) of $30,000 that will be recovered at the end of the project's life . The new machine is more efficient, so the firm's incremental earnings before interest and taxes (EBIT) will Increase by a total of $400,000 in each of the next six years (years 1-6). Hint: This value represents the difference between the revenues and operating costs (including depreciation expense) generated using the new equipment and that earned usingahe old equipment. The project's cost of capital is 13%. The company's annual tax rate is 30%. . * Complete the following table and compute the incremental cash fows associated with the replacement of the old equipment with the new equipment. Year o Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Initial investment EBIT - Taxes + New depreciation $400,000 Oid depreciation + Salvage value - Tax on salvage - NWC + Recapture of NWC Total free cash flow $480,000