The new equipment will have a cost of $$2,400,000,$ 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 working capital $($NWC$)$ of $$50,000$ 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.

$+$

Depreciation

$T$

Salvage

value

Tax on

salvage

NWC

Recapture

of NWC

Total free

cash flow

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

$-$$$469,840$

$-$$$532,486$

$-$$$626,454$

$-$$$720,422$