Sentry Company is contemplating the purchase of a new high speed shredder to replace the existing shredder. The existing shredder was purchased 5 years ago at an installed cost of $ 90,000; it was being depreciated under MACRS using a 7 yr. recovery period. The existing shredder is expected to have a usable life of 7 more years. The new shredder costs $ 230,000, and requires $ 20,000 in installation costs; it has a 7 year usable life and would be depreciated under MACRS using a 7 year recovery period. The existing shredder can currently be sold for $ 30,000 without incurring and any removal or cleanup costs. To support the increased business resulting from purchase of the new shredder, accounts receivable would increase by $ 50,000, inventories by $ 50,000, and accounts payable by $ 100,000. At the end of 7 years, the old shredder is expected to have a book value of zero, but unfortunately, management has no idea what the market value of the new shredder would be at the end of 7 years. The best they could do was come up with the following probabilistic estimates of its residual market value (after accounting for removal and cleanup costs) at the end of 7 years:

Calculate the initial investment, the incremental operating cash flows, the terminal cash flows, and the NPV of the proposed replacement if the opportunity cost of capital is 9.725%. Base your analysis on expected cash flows. In addition, would the uncertainty in the estimated residual market value of the new shredder at the end of the 7 years cause you to change your decision to replace the old shredder? Why or why not? Provide explicit calculations to support your conclusions

Probability Market Value S 0.00 0.10 0,20 20,000 0.50 S 80,000 The firm pays 33 taxes on ordinary income but only half this rate on capital gains. The estimated profits before depreciation and taxes overthe Zyear period for both the new and existing shredders are shown in the following table: PROFITS BEFORE DEPRECIATION AND TAXES YEAR. NEW SHREDDER EXISTING SHREDDER S 70,000 S 99,000 S 87,000 S 80,000 s 110,000 S 76,000 S 120,000 S 55,000 s 150,000 S 52,000 S 190,000 S 50,000 S205,000 S 50,000