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The new equipment will have a cost of $1,800,00, and it will be depreciated on a straight-line basis over a period of six years (years
The new equipment will have a cost of $1,800,00, and it will be depreciated on a straight-line basis over a period of six years (years 1-6). The oid machine is also being depreclated on a straight-Ine basis. It has a book value of s200,000 (at year 0) and four more years of depreciation left ($50,000 per year). The new equipment will have a salvage value of so at the end of the projet's life (year 6). The old machine has a current salvage value (at year o) of $300,000. . . Replacing the old machine will require an investment in net working capital (NWC) of $30,000 that will be recovered at the end of the project's life (year The new machine is more efficient, so the firm's incremental earnings before interest and taxes (EBIT) will increase by a total of $600,000 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 35%. Complete the following table and compute the incremental cash flows associated with the replacement of the oid equipment with the new equipment. Year o Year 1 Year 2 Year 3 Year 4 Year S Year 6 Initial investment EBIT $600,000 -Taxes + New depreciation Oid depreciation + Salvage value Tax on salvage - NWC + Recapture of NWC Total free cash flow $690,000 The net present value (NPV) of this replacement project is $1,058.995 $1,270,794 $1,217,844 O $900, 146
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