The new equipment will have a cost of $1,200,000, and it will be depreciated on a straight-line basis over a period of six years (years 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 $400,000 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 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year o $1,200,000 Initial investment EBIT $400,000 $160,000 $400,000 $160,000 $400,000 $160,000 $400,000 $160,000 $400,000 $160,000 $400,000 $160,000 Taxes + New depreciation - Old depreciation + Salvage value Tax on salvage NOWC + Recapture of NOWC Total free cash flow $440,000 The net present value (NPV) of this replacement project is: O $646,813 $485,110 O $743,835 O $549,791 Luthering Corp. has to choose between two mutually exclusive projects. If it chooses project A, Luthering Corp. will have the opportunity to make a similar investment in three years. However, if it chooses project B, it will not have the opportunity to make second investment. The following table lists the cash flows for these projects. If the firm uses the replacement chain (common life) approach, what will be the difference between the net present value (NPV) of project A and project B, assuming that both projects have a weighted average cost of capital of 12%? Cash Flow Project A Project B Year : -$20,000 Year 0: -$45,000 Year 1: $11,000 Year 1: $9,000 Year 2: $17,000 Year 2: $16,000 Year 3: $16,000 Year 3: $15,000 Year 4: $14,000 Year 5: $13,000 Year 6: $12,000 O $13,982 O $11,514 O $18,094 O $14,804 0 $16,449 Luthering Corp. is considering a four-year project that has a weighted average cost of capital of 11% and a NPV of $75,682. Luthering Corp. can replicate this project indefinitely. What is the equivalent annual annuity (EAA) for this project? O $20,735 O $24,394 O $28,053 O $25,614 O $29,273