12- Assignment - Cash Flow Estimation and Risk Analysis At times firms will need to decide if they want to continue to use their current equipment or replace the equipment with newer equipment. The company will need to do replacement analysis to determine which option is the best financial decision for the company. Price Co. is considering replacing an existing piece of equipment. The project involves the following: - The new equipment will have a cost of $9,000,000, and it is eligibie for 100% bonus depreciation 50 it will be fully depreciated at t=0. - The old machine was purchased before the new tax law, so it is being depreciated on a straight-line basis. It has a book value of $200,000 (at year 0 ) and four more years of depreciation left ( $50,000 per year). - The new equipment will have a solvage value of $0 at the end of the project's life (year 6 ). The old machine has a current saivage value (at year 0 ) of $300,000. - Replacing the old machine will require an investment in net operating working clipital (NOWC) of 530,000 that will be cecovered at the end of the project's life (year 6 ). - The new machine is more efficient, so the firms incremental earnings before interest and taxes (E8IT) will increase by a totat of $500,000 in each of the next six years (years 1-6). Hint: This value represents the difference between the revenues and operating costs (including depreciation expense) generated using the new equipment and that earned using the old equipment. - The projects cost of capital is 13%. - The compony's annual tex rate is 25% Aechoture of NOWS Total tree cosh now 12-Assignment-Cash Flow Estimation and Risk Analysis + Salvage value - Tax on salvage - NOWC + Recapture of NOWC Total free cash fow The net present value (NPV) of this replacement project is: 55,028,690 56,034,428 54,274,386 $5,782,994