The firm is considering the replacement of old equipment with new equipment. The characteristics of the old and new equipment are given below:

If the replacement is made, an additional investment of 3,000 in net working capital will be required. The tax rate is 20%, and the required rate of return on the project is 12%.

A.Calculate the initial cash outlay.

B.Calculate the incremental after-tax operating cash flows for Years 1 5.

C .Calculate the terminal year after-tax non-operating cash flow.

D.Calculate the projects net present value. Would the replacement project result in added value?

New Equipment 5,000 2,000 Old Equipment Current book value Current market value Remaining life Annual sales Cash operating expenses (per year) Annual depreciation expense 5 years 20,000 14,000 1,000 Acquisition cost Useful life Annual sales Cash operating expenses (per year) Annual depreciation expense 25,000 5 years 20,000 7,000 5,000 Book value (end of year 5) Expected salvage value (end of year 5) alo Book value (end of year 5) Expected salvage value (end of year 5) 0 4,000