- The new equipment will have a cost of $1,200,000, and it is eligible for 100% bonus depreciation so it will be fully depreciated at t=0 - The old machine was purchased before the new tax law, so it is 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 t 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 $300,000 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 25%. Depreciation T+Salvage value - Tax on salvage - NOWC Recapture of NOWC Total free cash flow The net present value (NPV) of this replacement project is: $181,800 $245,964 $256,658 $213,882