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Wildhorse Inc. wants to replace its current equipment with new high-tech equipment. The existing equipment was purchased 5 years ago at a cost of $128,000.
Wildhorse Inc. wants to replace its current equipment with new high-tech equipment. The existing equipment was purchased 5 years ago at a cost of $128,000. At that time, the equipment had an expected life of 10 years, with no expected salvage value. The equipment is being depreciated on a straight-line basis. Currently, the market value of the old equipment is $44,600. The new equipment can be bought for $177,400, including installation. Over its 10 -year life, it will reduce operating expenses from $192,100 to $148,300 for the first six years, and from $204,400 to $192,500 for the last four years. Net working capital requirements will also increase by $20,500 at the time of replacement. It is estimated that the company can sell the new equipment for $24,000 at the end of its life. Since the new equipment's cash flows are relatively certain, the project's cost of capital is set at 10%, compared with 15% for an average-risk project. The firm's maximum acceptable payback period is 5 years
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