The new equipment will have a cost of $$600,000,$ 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 $$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 $$600,000$ in each of the next six years $($years $1-$

$.$ 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 $25\%.$

Complete the following table and compute the incremental cash flows associated with the

replacement of the old equipment with the new equipment.

cash flow

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

$$1,326,622$

$$1,560,732$

$$1,170,549$

$$1,794,842$