Williamston Widgets Inc. (WWI) wishes to determine whether it would be advisable to replace an existing production system with a new automated one. They have hired you as a consultant to determine whether the new system should be purchased. The data you will need is as follows:

• WWI has decided to set a project timeline of 4 years.
• The new system will cost $3,200,000. It will be depreciated (straight line) over a five-year period (its estimated useful life), assuming a salvage value of $200,000 the amount the company will be writing the new system down to over its five-year expected life).
• The old system, which has been fully depreciated, could be sold today for $506,329. The company has received a firm offer for the system from Stockbridge Sprockets, and WWI will sell it only if they purchase the new system.

• Additional sales generated by the superior products made by the new system would be $3,000,000 in Year 1. In Years 2 and 3 sales are projected to grow by 4.5% per year. However, in Year 4 sales are expected to decline by 10% per year as the market starts to become saturated.

• Total expenses have been estimated at 74.0% of Sales.

• The firms tax rate 21%.

• WWI requires a minimum return on the replacement decision of 8.5%.

• A representative from Stockbridge Sprockets has told WWI that they will also buy the system from them at the end of the project (the end of Year 4) for $600,000. WWI has decided to include this in the terminal value of the project.

• The project will require $200,000 in additional Net Working Capital, 40% of which will be recovered at the end of the project.

A B D E F G 1 2 VALUE DRIVERS 3 4 5 6 7 8 9 10 11 12 13 14 15 Years 0 1 2 3 4 16 17 Capital Spending 18 19 OCF: 20 Revenues 21 Expenses 22 Depreciation 23 EBIT 24 Taxes 25 Net Income 26 Depreciation 27 OPERATING CASH FLOW 28 29 Net Working Capital 30 31 32 Total Cash Flow 33 34 NPV 35 IRR