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please help!! At times firms will need to dedide if they want to continue to use their current equipment or raplace the equipment with newer
please help!!
At times firms will need to dedide if they want to continue to use their current equipment or raplace the equipment with newer equipment. The company will need to do reslacement analysis to determine which option is the best financial decision for the companc. Price Co, is considering replacing an existing plece of equipment. The project involves the following: - The new equipment will have a cost of $2,400,000, and it will be depreciated on a straight-line basis over a period of six years (years 16). - The old machine is also beino depreciated on a straight-line basis. It has a book value of 3200,000( at year 0) and four more vears of depredation left (550,000 per vear). - The new equipment will have a salvage value of so at the end of the project's life (year 6 ). The old machine has a current saivage value (at year 0 ) of $300,000. - Replading 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 (year 6). - The new machine is more efficient, so the firm's incremental tamings before interest and takes (EerT) will increase by a total of $400,000 in each of the next six years (vears 16 ). Hint: This value represents the difference between the revenues and operating costs (induding depreciation expense) generated using the new equipment and that eamed using the old equipment. - The project's cost of capital is 13%. - The company's annual tax rate is 308 . Complete the following tabie and compute the incremental cash flowi assoclated with the replacement of the oid oqulpment with the new equipment. The net present value (TWPV) of this replacement project is: 5443,391 3502,510 5709.426 $591,188 Step by Step Solution
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