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Please help me fill out this chart, answers I put might not be correct. The net present value (NPV) of this replacement project is: $976,690
Please help me fill out this chart, answers I put might not be correct.
The net present value (NPV) of this replacement project is:
$976,690
$1,123,194
$830,187
$1,172,028
4. Analysis of a replacement project At times firms will need to dedide If they want to continue to use their current equipment or replace the equipment with newer equipment. The company will need to do replacement analys/s to determine which option is the best financlal declsion for the company. Price Co. Is considering replacing an existing plece of equipment. The project involves the following: - The new equipment will have a cost of $600,000, and It is elligle for 100% bonus depreclation so it will be fully depreclated at t=0. - The old machine was purchased before the new tax law, so It is being depreclated on a straight-llne basls. It has a book value of $200,000 (at year 0 ) and four more years of depreclation left ($50,000 per 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 0 ) of $300,000. - Replacing the old machine will require an Investment In net operating working capital (NOwC) of $20,000 that will be recovered at the end of the project's life (year 6). - The new machine is more efficlent, so the firm's incremental earnings before interest and taxes (EBIT) will increase by a total of $400,000 in each of the next slx years (years 1-6). Hint: This value represents the difference between the revenues and operating costs (Including depreclation expense) generated using the new equipment and that earned using the old equipment. - The profect's cost of capital is 13%. - The company's annual tax rate is 25%. Complete the following table and compute the Incremental cash flows assoclated with the replacement of the old equipment with the new equipmentStep by Step Solution
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