PC Shopping Network may upgrade its modem pool. It last upgraded 1 year ago, when it spent $102 million on equipment with an assumed life of 4 years and an assumed salvage value of $23 million for tax purposes. The firm uses straight-line depreciation. The old equipment can be sold today for $86 million. A new modem pool can be installed today for $149 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 $15 million per year and decrease operating costs by $15 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 11%. (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? (Round your answer to 2 decimal places.) The net cash flow at time 0 $ million b. What is the incremental cash flow in year 1? (Round your answer to 3 decimal places.) The incremental cash flow in year 1 million What is the incremental cash flow in year 2? (Round your answer to 3 decimal places.) The incremental cash flow in year 2 $ million What is the incremental cash flow in year 3? (Round your answer to 3 decimal places.) The incremental cash flow in year 3 million C. What is the NPV of the replacement project? (Round your answer to 2 decimal places.) NPV million What is the IRR of the replacement project? (Round your answer to 2 decimal places.) IRR % 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 $35 million at the end of 3 years. (Round your answer to 2 decimal places.) NPV $ million PC Shopping Network may upgrade its modem pool. It last upgraded 1 year ago, when it spent $102 million on equipment with an assumed life of 4 years and an assumed salvage value of $23 million for tax purposes. The firm uses straight-line depreciation. The old equipment can be sold today for $86 million. A new modem pool can be installed today for $149 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 $15 million per year and decrease operating costs by $15 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 11%. (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? (Round your answer to 2 decimal places.) The net cash flow at time 0 $ million b. What is the incremental cash flow in year 1? (Round your answer to 3 decimal places.) The incremental cash flow in year 1 million What is the incremental cash flow in year 2? (Round your answer to 3 decimal places.) The incremental cash flow in year 2 $ million What is the incremental cash flow in year 3? (Round your answer to 3 decimal places.) The incremental cash flow in year 3 million C. What is the NPV of the replacement project? (Round your answer to 2 decimal places.) NPV million What is the IRR of the replacement project? (Round your answer to 2 decimal places.) IRR % 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 $35 million at the end of 3 years. (Round your answer to 2 decimal places.) NPV $ million
