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Seeking clarification on this question , thank you Today is T=0. The UFRO Company is considering the replacement of an existing computer with a new

Seeking clarification on this question , thank you

Today is T=0. The UFRO Company is considering the replacement of an existing computer with a new computer that is faster and has expanded capacity. If the new computer is purchased, the existing (old) computer will be sold for $75,000. The existing computer was purchased two years ago (T=-2) for $350,000. It is being depreciated over its 5-year life using the 3-year MACRS schedule. It is expected to salvage for $20,000 (T=3).

The new computer will be purchased for $500,000. If the new computer is purchased, accounts receivable will increase immediately by $25,000, inventory will decrease immediately by $55,000, and accounts payable will decrease immediately by $30,000. The UFRO Company has a 30% corporate tax rate. The modification to the building, paid by UFRO, will cost $100,000. Shipping and installation for the new computer will cost $65,000, but it will be paid by the manufacturer.

If the new computer is purchased, sales in year 1 will be $700,000, sales in year 2 will be $800,000, and sales in year 3 will be $850,000. Without the new computer, sales in each year will be $500,000. Operating expenses will be 40% of sales with the new computer; they are 50% of sales with the old computer. If the new computer is purchased, accounts receivable will increase at T=1 by $10,000 and at T=2 by $15,000.

The new computer will be depreciated using the 3-year MACRS schedule [yr.1: 33%; yr. 2: 45%; yr. 3:15%; yr. 4: 7%]. The new computer will be sold, however, after three (3) years for $30,000. The UFRO Company has a cost of capital of 12%. Identify the relevant cash flows for capital budgeting.

Calculate the NPV, IRR, MIRR, and Payback Period.

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