Topic FCF and valuation

Mena is an IT company. The company wants to improve their IT solution business by improving their bigdata and supercomputers. In doing so, the company can be either upgrade the original version or replace with new version. Gulf United will acquire bigdata and supercomputers by using the most efficient way. Gulf United is in the 40% tax bracket and cost of capital of 10%.

The conditions of the upgrade the original version or replace with the new version for bigdata facilities and supercomputers are as follows:

Original version:

• Initial cost of old big data = $ 150,000
• Annual depreciation of $ 15,000
• The old big data facilities were purchased 5 years ago
• The current book value of old bigdata = $ 75,000
• The salvage value of old bigdata (today) = $ 95,000
• The salvage value in 5 years = $ 20,000

New version-Replace:

• Initial cost of new bigdata = $ 250,000
• Its anticipated to have 5 years life
• The salvage value in 5 years = $ 0
• Cost savings per year = $ 75,000 per year
• The company will use 3-years MACRS depreciation.
  1. Calculate the depreciation expense for new bigdata (Yr.1 Yr.5) using MACRS method.
  2. Calculate the projected net income (Yr.1 Yr.5).
  3. Find the after-tax salvage value of old big data in Yr.0.
  4. Calculate incremental net capital spending in Yr.0
  5. Find the after-tax salvage value of old big data in Yr.5
  6. Calculate the operating cash flows (OCF) from Yr.1 Yr.5
  7. Calculate the total cash flow (or cash flow from assets CFFA) from Yr.0 Yr.5
  8. Calculate the NPV and IRR (you may use financial calculator)
  9. Should they replace bigdata with the new version?
  10. Explain the concept of incremental cash flows and stand-alone principle?