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

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

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?

Task 4:

The firm is planning to invest up to 65 million next year. The information about the available investment projects is given in the table below.

Project	Initial investment, millions of	Internal rate of return	Net present value, millions of	Profitability index
A	50	15%	12
B	35	19%	15
C	30	28%	42
D	25	26%	1
E	15	20%	10
F	10	37%	11
G	10	25%	13
H	1	18%	0.1

Assuming the projects are not divisible, use the profitability index(PI) as a criterion to determine the value-maximizing combination of projects. Show the calculations of the profitability indexes in the final column of the table.