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Your company is considering replacing an existing piece of equipment. The company has collected the following information about the proposed replacement. ( Note: You may
Your company is considering replacing an existing
piece of equipment. The company has collected the
following information about the proposed
replacement. Note: You may or may not need to
use all of this information, use only the information
that is relevant.
The new equipment has a price at Year of
$ and will be depreciated on a straight line
basis over years Year It will have a salvage
value of $ at Year
The old machine was also being depreciated on a
straight line basis. It has a book value at Year of
$ and four more years left of depreciation
$ per year in Year and a current salvage
value at Year of $
If the company goes ahead with the replacement, it
will have an effect on the company's net working
capital. At Year inventory will increase by $
and accounts payable will increase by $ At
Year the net working capital will be recovered
after the project ends.
The replacement machine, because of efficiencies, is
expected to produce incremental EBIT of $
for each of the next years Year
The company's interest expense each year will be
$ per year.
The company's overall WACC is percent.
However, the proposed replacement project is
more risky than the average project, leading the firm
to use a WACC of percent for this project.
The company's tax rate is percent.
Determine the NPV for this project.
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