Fin $338$ Exam $2$

Part III: Replacement Project Analysis $(20$ points$)$

A firm is considering replacing an old piece of machinery which has a book value of $$20,000$ and $4$ years of remaining

life. The machine will be depreciated using the straight$-$line method if kept. It would have no salvage value at the end of

old machine could be sold today for $$30,000($i$.$e$.$ SVold $(t=0)=$$$30,000.$

A replacement machine will cost $$100,000,$ an additional $$50,000$ to be delivered and installed. The new machine has an

estimated life of $4$ years, will be depreciated fully with the straight$-$line mach

by $$23,000$ due to increased sald requice annual operating cOs $$2,500.$

WACC is $10\%.$ Should the firm replace the old machine?

a$)$ What is the project's cash flow in year $0,$ i$.$e$.C{F}_0?($Hint: this is a replacement project, don't forget the

ATSV old,t$=0$ machine!$)(4$ pts$)$