Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

The net present value (NPV) of this replacement project is: $874,595. $1,399,352. $1,166,127. $1,341,046. cost of $1,800,000, and it will be depreciated on a straight-line

image text in transcribed

The net present value (NPV) of this replacement project is:

$874,595.

$1,399,352.

$1,166,127.

$1,341,046.

cost of $1,800,000, and it will be depreciated on a straight-line basis over a period of six years (years The new equipment will have 1-6). The old machine is also being depreciated on a straight-line basis. It has a book value of $200,000 (at year 0) and four more years of depreciation left ($50,000 per year). The new equipment will have a salvage value of $0 at the end of the project's life (year 6). The old machine has a current salvage value (at year 0) of $300,000. Replacing the old machine will require an investment in net operating working capital (NOWC) of $45,000 that will be recovered at the end of the project's life (year 6). The new machine is more efficient, so the firm's incremental earnings before interest and taxes (EBIT) will increase by a total of $700,000 in each of the next six years (years 1-6). Hint: This value represents the difference between the revenues and operating costs (including depreciation expense) generated using the new equipment and that earned using the old equipment. The project's cost of capital is 13%. The company's annual tax rate is 40%. Complete the following table and compute the incremental cash flows associated with the replacement of the old equipment with the new equipment. Year o Year 1 Year 2 Year 3 Year 4 Year 5 Initial investment EBIT - Taxes + New depreciation - Old depreciation + Salvage value - Tax on salvage - NOWC + Recapture of NOWC Total free $720,000 cash flow

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Public Finance

Authors: Harvey S Rosen, Ted Gayer

9th International Edition

0071267883, 9780071267885

More Books

Students also viewed these Finance questions

Question

What are the functions of the foreign exchange market?

Answered: 1 week ago

Question

1. To generate a discussion on the concept of roles

Answered: 1 week ago