You recently began working for Orange Fizz Company and management is contemplating the replacement of its existing, three-year old (Third-year depreciation completed) bottling machines that originally cost $14,000,000 with newer and more efficient machines. The old (existing) machines were placed on the MACRS five-year class life depreciation schedule (assuming half-year convention) three-years ago. Total operating costs for the old bottling machines are $5,400,000 per year and Orange Fizz will bottle 48 million (48,000,000) bottles per year each year for the next seven years. The firm expects to realize a $1,000,000 return from salvaging the old machines in 7 years; however, the existing machines may be sold now to another firm in the industry for $2,200,000. If Orange Fizz retains the old machines, they would remain operational for the next 7-years.

The new bottling machines, if purchased, would cost $15,500,000 and would be placed on a MACRS five-year class life depreciation and will remain in operation for the next 7 years. The new machines are expected to have a salvage value of $1,600,000 in seven years. Total annual savings in operating costs of $0.071 per bottle will be realized if the new bottling machines are installed. The company is in the 26% income tax bracket and it has a 10% WACC.

Determine if the replacement should occur by estimating the replacement project's NPV and IRR. Use and hand in an Excel Spreadsheet similar to the Johnson and Carleton problem spreadsheet provided to you to solve this problem. Use a relative (incremental) cash flow analysis similar to what we did in the Johnson and Carleton example problem and other problems in your text.

NWC = NWC for new project - NWC for old project, where, NWC = inventory + accounts receivables - accounts payables. For problem 5 in the Final exam, NWC = 0.