The replacement of existing taxis is expected to substantially increase annual revenues, and only slightly increase annual operating expenses. The existing taxi fleet was purchased 3 years ago at a cost of $580,000 and was expected to be fully depreciated over a useful life of 9 years. As of today, Gold Coast Cabs expects they would be able to sell their existing taxi fleet for $435,000 to a large second-hand car wholesaler. The firm’s marginal tax rate is 30%. The new taxi fleet would cost Gold Coast Cabs $710,000 (inclusive of shipping and modification costs) and will require Gold Coast Cabs to initially increase their net working capital by $40,000. The new taxi fleet will be fully depreciated over a useful life of 6 years. The firm’s current annual revenues and operating expenses are $860,000 and $630,000 per annum respectively. If the firm proceeds with this asset replacement project, their annual revenues and operating expenses are expected to increase to $980,000 and $670,000 per annum respectively. At the end of the projects 6-year life, Gold Coast Cabs anticipates they will be unable to sell the new taxi fleet and will be forced to scrap all cars for free.

Required:

a) Calculate the after-tax proceeds from selling the existing taxi fleet as of today.

b) Calculate the project’s net investment as of today.

c) Calculate the projects annual after-tax net operating cash flows for years 1 through 6, and any termination cash flow occurring in the last year of the project.

d) Assuming Gold Coast Cabs’ cost of capital is 12%, should they accept this asset replacement project? Why or why not? Please support your answer with appropriate calculations, and briefly explain your answer.

A fast response would be appreciated.