Problem 3 ABC Inc. wishes to buy new machinery that would cost $166,000, but it would lead to increased output, higher sales, and higher costs. Moreover, the firm would receive $100,000 after taxes for the old machine. The new machine would result in sales of $120,000 per year versus old sales of $70,000, and the new costs would be $40,000 versus old costs of $20,000. Finally, the old machine was being depreciated at the rate of $10,000 per year, but the new machine would have $30,000 of annual depreciation. The marginal tax rate is 25 percent and WACC is 10 percent. Based on these figures, and assuming the new and old machines both have a life of four years, find the incremental cash flows.

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Problem 3 - Evaluating a Replacement Project NewSalesOldSalesChangeinSales???????????????????????? \begin{tabular}{rclll} New Costs & ?? & ?? & ?? & ?? \\ Old Costs & ?? & ?? \\ \hline Change in Costs & ?? & ?? & ?? & ?? \end{tabular} New Depreciation Old Depreciation Change in Depreciation \begin{tabular}{llll} ?? & ?? & ?? & ?? \\ ?? & ?? & ?? \\ \hline?? & ?? & ?? & ?? \end{tabular} Earnings Before Income Tax (EBIT) ?? ? ? Net Operating Profits (NOPAT) Add Back Depreciation Operating Cash Flow \begin{tabular}{llll} ?? & ?? & ?? & ?? \\ \hline?? & ?? & ?? & ?? \\ \hline \end{tabular} Free Cash Flow \begin{tabular}{lllll} \hline? & ?? & ?? & ?? \\ \hline \end{tabular} Required Rate of Return (WACC) ?? NPV IRR