Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

PC Shopping Network may upgrade its modem pool. It last upgraded 2 years ago, when it spent $100 million on equipment with an assumed life

image text in transcribed
image text in transcribed
PC Shopping Network may upgrade its modem pool. It last upgraded 2 years ago, when it spent $100 million on equipment with an assumed life of 5 years and an assumed salvage value of $17 million for tax purposes. The firm uses straight-line depreciation. The old equipment can be sold today for $84 million. A new modem pool can be installed today for $142 million. This will have a 3 -year life, and will be depreciated to zero using straight-line depreciation. The new equipment will enable the firm to increase sales by $25 million per year and decrease operating costs by $8 million per year. At the end of 3 years. the new equipment will be worthless. Assume the firm's tax rate is 35% and the discount rate for projects of this sort is 13\%. (Enter your answers in millions. For example, an answer of $13,000,000 should be entered as 13 . Use minus sign to enter cash outflows, if any.) a. What is the net cash flow at time 0 if the old equipment is replaced? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b-1. What is the incremental cash flow in year 1? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b-2. What is the incremental cash flow in year 2? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b-3. What is the incremental cash flow in year 3? (Do not round intermediate calculations, Round your answer to 2 decimal places.) c-1. What is the NPV of the reolacement oroiect? IDo not round intermediate calculations.Round vour c-1. What is the NPV of the replacement project? (Do not round intermediate calculations.Round your answer to 2 decimal places.) c-2. What is the IRR of the replacement project? (Do not round intermediate calculations. Round your answer to 2 decimal places.) d. Now ignore straight-line depreciation and assume that both new and old equipment are in an asset class with a CCA rate of 30%. PC Shopping Network has other assets in this asset class. What is the NPV of the replacement project? For this part, assume that the new equipment will have a salvage value of $29 million at the end of 3 years. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

The Finance Book

Authors: Stuart Warner, Si Hussain

1st Edition

1292123648, 978-1292123646

More Books

Students also viewed these Finance questions

Question

=+b) Create a p chart for these samples.

Answered: 1 week ago