Problem 9-34 Project Evaluation (LO2, 3)

PC Shopping Network may upgrade its modem pool. It last upgraded 2 years ago, when it spent $122 million on equipment with an assumed life of 5 years and an assumed salvage value of $15 million for tax purposes. The firm uses straight-line depreciation. The old equipment can be sold today for $76 million. A new modem pool can be installed today for $160 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 $20 million per year and decrease operating costs by $12 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 10%. (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? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

b-1. What is the incremental cash flow in year 1? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

b-2. What is the incremental cash flow in year 2? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

b-3. What is the incremental cash flow in year 3? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

c-1. What is the NPV of the replacement project? (Do not round intermediate calculations.Round your answer to 2 decimal places.)

c-2. What is the IRR of the replacement project? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

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 $29 million at the end of 3 years. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Note: I would appreciate if all steps were shown to help me understand where the answer is coming from.