Question
The firm is subject to a 40% tax rate. The company's cost of capital is 8%. The estimated earnings before depreciation, interest, and taxes over
The firm is subject to a 40% tax rate. The company's cost of capital is 8%.
The estimated earnings before depreciation, interest, and taxes over the 5 years for both the new and the existing grinder are shown in the following table.
Earnings before depreciation, interest, and taxes
Year | New grinder | Existing grinder |
1 2 3 4 5 | $53,000 53,000 53,000 53,000 53,000 | $26,000 24,000 22,000 20,000 18,000 |
b. Determine the incremental operating cash flows associated with the proposed grinder replacement.
c. Use the estimated initial cash flow and the terminal cash flow in the part one together with the operational cash flow identified in this part, evaluate the project using net present value and the internal rate of return.
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