You are an external capital budgeting advisor to a highly successful manufacturing firm. You have recently received a proposal for equipment replacement that will presumably lead to more capacity and less cost. The replacement details are given below.

If the new equipment replaces the old equipment, an additional investment of $80,000 in net working capital will be required. The tax rate is 30% and the required rate of return is 10%.

As you work through the NPV and IRR analysis provided by the company, you discover the following errors:

The initial outlay correctly accounts for incremental investment in new fixed capital and net working capital but after-tax cash proceeds from the sale of old fixed capital are not adjusted.

Annual operating cashflows are not adjusted for tax and depreciation is not added back.

Terminal-year after-tax non-operating cashflows do not recapture investment in net working capital. Also, incremental capital gains on salvage value are not taxed.

Calculate the initial outlay, year on year after-tax operating cash flows, and terminal-year after-tax non-operating cashflow for the old and new equipment.

Old Equipment Current book value Current market value Remaining life (yrs.) New Equipment 400,000 600,000Acquisition cost 10 300,000 120,000 Cash operating $ 1,000,000 10 450,000 150,000 Life (yrs.) nnual sales nnual sales Cash operating expenses xpenses nnual depreciation 40,000 Annual depreciation $ 100,000 ccounting salvage value 0 Accounting salvage S value Expected salvage value 100,000 Expected salvage 200,000 value