Year 1 Year 2 Year 3 Year 4 Year 5 Year o $1,200,000 Initial investment EBIT $400,000 $400,000 $400,000 $400,000 140,000 Taxes 140,000 $400,000 140,000 200,000 140,000 200,000 140,000 200,000 + New 200,000 200,000 50,000 50,000 50,000 50,000 depreciation - Old depreciation + Salvage value 300,000 35,000 - Taxon salvage - NOWC 45,000 - Recapture of NOWC Total free cash flow 5980,000 $410,000 $410,000 $410,000 $410.000 $450,000 $5 The net present value (NPV) of this replacement project is: $878-117 5621,999 5841.529. Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year o $1,200,000 $400.000 $400,000 $400,000 140,000 200,000 $400,000 140,000 200,000 $400,000 140,000 200,000 $400,000 140,000 200,000 140,000 200,000 140,000 200.000 50,000 50,000 50,000 50,000 100,000 35,000 $5,000 45,000 S. $410,000 10,000 $410,000 S40.000 5460.000 $505,000 The present value (N) of this replacement project is 78.117 $631.999 The net present value (NPV) of this replacement project is: O $878,117. $621,999. O $841,529. O $731,764, At times firms will need to decide if they want to continue to use their current equipment or replace the equipment with newer equipment The company will need to do replacement analysis to determine which option is the best financial decision for the company Price Co. is considering replacing an existing piece of equipment. The project involves the following: The new equipment will have a cost of $1,200,000, and it will be depreciated on a straightline basis over a period of six years (years 1-6). The old machine is also being deprecated on a straight-line basis. It has a book value of $200,000 (at year) and fout 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 $45,000 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 $400,000 in each of the next six years (years 1-6). Hint: This value represents the difference between the revenues and operating costs induding depreciation expense generated using the new equipment and that earned using the old equipment The project's cost of capital is 139 The company annual tax rate is 35