In Figure 13-9 we assumed that output would remain stable if the old machine were replaced. Suppose output would double. How would this change be dealt with in the framework of Figure 13-9?

Figure 13-9

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15 Part 1. Inputs: 16 B D E F G H Both Applies to: Old New 17 18 Cost of new machine 19 After-tax salvage value old machine 20 Sales revenues (fixed) 21 Annual operating costs except depr. Machines Machine Machine $2,000 $400 $2,500 $1,200 $280 22 Taxrate 40% 23 WACC 10% 24 Depreciation 1 2 3 4 Totals: 25 Depr. rates (new machine) 33.33% 44.45% 14.81% 7.41% 100% 26 Depreciation on new machine, $667 $889 $296 $148 $2,000 27 Depreciation on old machine $334 $333 $0 $0 $667 28 Part II. Net Cash Flows before Replacement: Old Machine 29 30 Sales revenues 31 Operating costs except depreciation 32 Depreciation 33 Total operating costs 34 Operating income 0 1 2 3 4 $2,500 $2,500 $2,500 $2,500 1,200 1,200 1,200 1,200 334 333 0 0 $1,534 $1,533 $1,200 $966 $967 $1,300 $1,200 $1,300 35 Taxes 40% 386 387 520 36 After-tax operating income $580 $580 $780 520 $780 37 Add back depreciation 334 333 0 0 38 Net cash flows before replacement 50 $914 $913 $780 $780 39 Part III. Net Cash Flows after Replacement: New Machine 40 0 1 2 3 4 41 New machine cost: -$2,000 42 After-tax salvage value, old machine $400 43 Sales revenues $2,500 $2,500 $2,500 $2,500 44 Operating costs except depreciation $280 $280 $280 $280 45 Depreciation $667 $889 $296 $148 46 Total operating costs $947 $1,169 $576 $428 47 Operating income $1,553 $1,331 $1,924 $2,072 48 Taxes 40% $621 $532 $770 $829 49 After-tax operating income 50 Add back depreciation $932 $7.99 $1,154 $1,243 $667 $889 $296 $148 51 Net cash flows after replacement -$1,600 $1,599 $1,688 $1,450 $1,391 52 Part IV. Incremental CF: Row 51- Row 38 53 Part V. Evaluation -$1,600 NPV= $584.02 $685 IRR= $774 $670 $611 26.33% MIRR= 18.90%