Please this is my last question and I really need help understating this. I have done all I could and still can figure it out.

Please this is my last question and I really need help understating this. I have done all I could and still can figure it out. Please help!

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7. Analysis of a replacement project At times firms will need to decide if they want to continue to use their current equipment or replace the equipment with newer equipment. In this case, the company will need to perform a replacement analysis to determine which alternative is the best financial decision for the company. Consider the case of Jones Company: The managers of Jones Company are considering replacing an existing piece of equipment, and have collected the following information: The new piece of equipment will have a cost of $1,200,000, and it will be depreciated on a straight-line basis over a period of five years (years 1-5). The old machine is also being depreciated on a straight-line basis. It has a book value of $200,000 (at year o) and three more years of depreciation left ($50,000 per year). . The new equipment will have a salvage value of $0 at the end of the project's life (year 5). The old machine has a current salvage value (at year 0) of $300,000. Replacing the old machine will require an investment in net working capital (NWC) of $50,000 that will be recovered at the end of the project's life (year 5). The new machine is more efficient, so the incremental increase in earnings before interest and taxes (EBIT) will increase by a total of $600,000 in each of the next five years (years 1-5). (Hint: This value represents the difference between the revenues and operating costs (including depreciation expense) generated using the new equipment and that earned using the old equipment. ) The project's required rate of return is 9%. The company's annual tax rate is 30%. Complete the following table and compute the incremental cash flows associated with the replacement of the old equipment with the new equipment. Year 1 Year 2 Year 3 Year 4 Year 5 Year o $1,200,000 Initial investment EBIT $600,000 $600,000 $600,000 $600,000 $600,000 Less: Taxes Plus: New depreciation Less: Old depreciation Plus: Salvage value Less: Tax on salvage Less: NWC 300,000 30,000 50,000 Plus: Recapture of NWC Total Net Cash Flow $660,000 The net present value (NPV) of this replacement project is Companies invest in expansion projects with the expectation of increasing the earnings of its business. Consider the case of Blue Llama Mining: Blue Llama Mining is considering an investment that will have the following sales, variable costs, and fixed operating costs: Year 1 Year 2 Year 3 Year 4 3,400 3,000 3,250 3,300 $17.25 $17.33 $17.45 $18.24 Unit sales (units) Sales price Variable cost per unit Fixed operating costs except depreciation Accelerated depreciation rate $8.88 $8.92 $9.03 $9.06 $12,500 $13,000 $13,220 $13,250 33% 45% 15% 7% This project will require an investment of $25,000 in new equipment. The equipment will have no salvage value at the end of the project's four-year life. Blue Llama Mining pays a constant tax rate of 40%, and it has a required rate of return of 11%. (Hint: Round each element in your computation- When using accelerated depreciation, the project's net present value (NPV) is including the project's net present value-to the nearest whole dollar.) $8,374 1 $10,468 (Hint: Again, round each element in your computation-including the When using straight-line depreciation, the project's NPV is project's net present value-to the nearest whole dollar.) $12,038 $9,539 $12,562 $10,041 S13,053 Using the accelerated depreciation method will result in the greater NPV for the project. straight-line No other firm would take on this project if Blue Llama Mining turns it down. How much should Blue Llama Mining reduce the NPV of this project if it discovered that this project would reduce one of its division's net after-tax cash flows by $300 for each year of the four-year project? $12,551 $1,024 $559 $ $931 $791 Blue Llama Mining spent $2,750.00 on a marketing study to estimate the number of units that it can sell each year. What should Blue Llama Mining do to take this information into account? The company does not need to do anything with the cost of the marketing study because the marketing study is a sunk cost. Increase the NPV of the project $2,750.00. Increase the amount of the initial investment by $2,750.00. 7. Analysis of a replacement project At times firms will need to decide if they want to continue to use their current equipment or replace the equipment with newer equipment. In this case, the company will need to perform a replacement analysis to determine which alternative is the best financial decision for the company. Consider the case of Jones Company: The managers of Jones Company are considering replacing an existing piece of equipment, and have collected the following information: The new piece of equipment will have a cost of $1,200,000, and it will be depreciated on a straight-line basis over a period of five years (years 1-5). The old machine is also being depreciated on a straight-line basis. It has a book value of $200,000 (at year o) and three more years of depreciation left ($50,000 per year). . The new equipment will have a salvage value of $0 at the end of the project's life (year 5). The old machine has a current salvage value (at year 0) of $300,000. Replacing the old machine will require an investment in net working capital (NWC) of $50,000 that will be recovered at the end of the project's life (year 5). The new machine is more efficient, so the incremental increase in earnings before interest and taxes (EBIT) will increase by a total of $600,000 in each of the next five years (years 1-5). (Hint: This value represents the difference between the revenues and operating costs (including depreciation expense) generated using the new equipment and that earned using the old equipment. ) The project's required rate of return is 9%. The company's annual tax rate is 30%. Complete the following table and compute the incremental cash flows associated with the replacement of the old equipment with the new equipment. Year 1 Year 2 Year 3 Year 4 Year 5 Year o $1,200,000 Initial investment EBIT $600,000 $600,000 $600,000 $600,000 $600,000 Less: Taxes Plus: New depreciation Less: Old depreciation Plus: Salvage value Less: Tax on salvage Less: NWC 300,000 30,000 50,000 Plus: Recapture of NWC Total Net Cash Flow $660,000 The net present value (NPV) of this replacement project is Companies invest in expansion projects with the expectation of increasing the earnings of its business. Consider the case of Blue Llama Mining: Blue Llama Mining is considering an investment that will have the following sales, variable costs, and fixed operating costs: Year 1 Year 2 Year 3 Year 4 3,400 3,000 3,250 3,300 $17.25 $17.33 $17.45 $18.24 Unit sales (units) Sales price Variable cost per unit Fixed operating costs except depreciation Accelerated depreciation rate $8.88 $8.92 $9.03 $9.06 $12,500 $13,000 $13,220 $13,250 33% 45% 15% 7% This project will require an investment of $25,000 in new equipment. The equipment will have no salvage value at the end of the project's four-year life. Blue Llama Mining pays a constant tax rate of 40%, and it has a required rate of return of 11%. (Hint: Round each element in your computation- When using accelerated depreciation, the project's net present value (NPV) is including the project's net present value-to the nearest whole dollar.) $8,374 1 $10,468 (Hint: Again, round each element in your computation-including the When using straight-line depreciation, the project's NPV is project's net present value-to the nearest whole dollar.) $12,038 $9,539 $12,562 $10,041 S13,053 Using the accelerated depreciation method will result in the greater NPV for the project. straight-line No other firm would take on this project if Blue Llama Mining turns it down. How much should Blue Llama Mining reduce the NPV of this project if it discovered that this project would reduce one of its division's net after-tax cash flows by $300 for each year of the four-year project? $12,551 $1,024 $559 $ $931 $791 Blue Llama Mining spent $2,750.00 on a marketing study to estimate the number of units that it can sell each year. What should Blue Llama Mining do to take this information into account? The company does not need to do anything with the cost of the marketing study because the marketing study is a sunk cost. Increase the NPV of the project $2,750.00. Increase the amount of the initial investment by $2,750.00