The following questions should be addressed in this assignment:

1. Find out the NPV, IRR and profitability index for the replacement proposal. What do these criteria say about the replacement? Begin the report by briefly explaining the capital budgeting methods. Explain why these criteria are considered superior to the accounting rate of return and payback period used by some firms.
2. Some estimates are subjective and may be prone to judgement error or uncertainty. For this reason, please conduct a sensitivity analysis of NPV to the required rate of return falling between the range of 10% to 16% pa (with increments of 1%) for the replacement proposal. Discuss the implications.

Old Equipment New Equipment Current book value $400,000 Current market value $600,000 Acquisition cost $1,000,000 Remaining life (years) 10 Life (years) 10 Associated annual sales $300,000 Associated annual sales $450,000 Associated operating expenses $120,000 Associated operating expenses $150,000 Annual depreciation $40,000 Annual depreciation $100,000 Accounting salvage value $0 Accounting salvage value $0 Expected salvage value $100,000 Expected salvage value $200,000 Old Equipment New Equipment Current book value $400,000 Current market value $600,000 Acquisition cost $1,000,000 Remaining life (years) 10 Life (years) 10 Associated annual sales $300,000 Associated annual sales $450,000 Associated operating expenses $120,000 Associated operating expenses $150,000 Annual depreciation $40,000 Annual depreciation $100,000 Accounting salvage value $0 Accounting salvage value $0 Expected salvage value $100,000 Expected salvage value $200,000