In Table 12.2, we assumed that output would not change if the old machine was replaced. Suppose output would actually double. How would this change be dealt with in the framework of Table 12.2?

Table 12.2

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12 A B 13 14 Sales revenues 15 Operating costs except depreciation 16 Depreciation 17 Total operating costs 22 Part I. Free Cash Flows Before Replacement: Old Machine (CAPEX and ANOWC = 0) 18 EBIT (or Operating income) 19 Taxes 25% 23 24 25 26 20 EBIT (1-T) = After-tax operating income 21 Add back depreciation Free cash flows before replacement EBIT(1-T) + DEP - CAPEX - ANOWC Part II. Free Cash Flows After Replacement: New Machine (ANOWC = 0) New machine invest, after 100% bonus depr. After-tax salvage value, old machine CAPEX, after taxes 27 Sales revenues 28 Costs except depreciation 29 Depreciation 30 Total operating costs 31 EBIT (or Operating income) 32 Taxes 25% 33 EBIT(1-T) = After-tax operating income 34 Add back depreciation Free cash flows after replacement 35 EBIT(1T) + DEP - CAPEX - ANOWC E 0 -$2,000 400 -$1,600 1 $2,500 1,140 100 $1,240 $1,260 315 $945 100 $1,045 $2,500 400 0 $400 $2,100 525 $1,575 0 -$1,600 $1,575 G 2 $2,500 1,140 100 $1,045 $1,240 $1,240 $1,260 $1,260 315 315 $945 $945 100 100 $2,500 400 0 $400 $2,100 525 $1,575 H 3 $1,575 $2,500 1,140 100 $1,045 $2,500 400 0 $400 $2,100 525 $1,575 $1,575 $2,500 1,140 100 $1,240 $1,260 315 $945 100 $1,045 $2,500 400 0 $400 $2,100 525 $1,575 0 $1,575