You are the Senior Financial Analysis and are presented with a capital budgeting request from the operations department. During your review you observed that the equipment being replaced was not properly accounted for in the analysis. They used the standard corporate capital budgeting template but excluded all of the cash flows relevant to the old equipment out of the analysis. Please review and determine a more accurate NPV for the proposed project.

Additional Information about the Original Equipment

The original equipment was purchased 3 years ago for $200,000 and was depreciating using the 5 Year MACRS depreciation schedule over 6 years. It has currently been depreciated 71% of the original cost. The equipment was planned to be sold at the end of its 5^th year of use before it was fully depreciated for a salvage value in two years at an estimated $30,000.

The old equipment has a current salvage value of $98,000. The excel template only requires your input into the Yellow Fields

Year 0 Net Sales Change Expense Change (Cost Savings) EBITDA (EBIT before Depreciation Expense) change Year 1 $45,000 10,000 55,000 Year 2 $50,000 10,000 60,000 Year 3 $60,000 10,000 70,000 Year 4 $60,000 10,000 70,000 Year 5 $60,000 10,000 70,000 Year 6 $60,000 10,000 70,000 Year 7 $60,000 10,000 70,000 Year 8 $60,000 10,000 70,000 New Equip (250,000) (50,000) Depreciation Expense (New Equipment) (80,000) (48,000) 20% 32% 19.2% 11.52% 11.52% 5.76% (28,800) (28,800) (14,400) Loss of Depreciation Expense (Replaced Equipment) (Replaced Equipment) EBIT Taxes 40% 5,000 (2,000) (20,000) 8,000 22,000 (8,800) 13,200 41,200 (16,480) 24,720 41,200 (16,480) 55,600 (22,240) 33,360 70,000 (28,000) 42,000 70,000 (28,000) NOPAT 3,000 (12,000) 24,720 42,000 Add back Depr 50,000 80,000 48,000 28,800 28,800 14,400 Sale of Equip Tax Opportunity Cost - Old Equip Salvage Opportunity Cost - Tax on Salvage Original FCF Corrected FCF (250,000 (250,000) 53,000 53,000 68,000 68,000 61,200 61,200 53,520 53,520 53,520 53,520 47,760 47,760 42,000 42,000 42,000 42,000 Discount Rate 6% 82,243 Original NPV Corrected NPV (Calculate) Year 0 Net Sales Change Expense Change (Cost Savings) EBITDA (EBIT before Depreciation Expense) change Year 1 $45,000 10,000 55,000 Year 2 $50,000 10,000 60,000 Year 3 $60,000 10,000 70,000 Year 4 $60,000 10,000 70,000 Year 5 $60,000 10,000 70,000 Year 6 $60,000 10,000 70,000 Year 7 $60,000 10,000 70,000 Year 8 $60,000 10,000 70,000 New Equip (250,000) (50,000) Depreciation Expense (New Equipment) (80,000) (48,000) 20% 32% 19.2% 11.52% 11.52% 5.76% (28,800) (28,800) (14,400) Loss of Depreciation Expense (Replaced Equipment) (Replaced Equipment) EBIT Taxes 40% 5,000 (2,000) (20,000) 8,000 22,000 (8,800) 13,200 41,200 (16,480) 24,720 41,200 (16,480) 55,600 (22,240) 33,360 70,000 (28,000) 42,000 70,000 (28,000) NOPAT 3,000 (12,000) 24,720 42,000 Add back Depr 50,000 80,000 48,000 28,800 28,800 14,400 Sale of Equip Tax Opportunity Cost - Old Equip Salvage Opportunity Cost - Tax on Salvage Original FCF Corrected FCF (250,000 (250,000) 53,000 53,000 68,000 68,000 61,200 61,200 53,520 53,520 53,520 53,520 47,760 47,760 42,000 42,000 42,000 42,000 Discount Rate 6% 82,243 Original NPV Corrected NPV (Calculate)