A company must develop the relevant cash flows for a replacement capital investment proposal. The proposed asset costs $50,000 and has installation costs of $3,000. The asset will be depreciated using a five-year recovery schedule. The existing equipment, which originally cost $25,000 and will be sold for $10,000, has been depreciated using an MACRS five-year recovery schedule and three years of depreciation has already been taken. The new equipment is expected to result in incremental before-tax net profits of $15,000 per year. The firm has a 40 percent tax rate. Note: Assume that both the old and the new equipment will have terminal values of $0 at the end of year 5. The WACC for the company is 10%.

1- determine the NPV

2- determine the IRR

3- should it reject or accept the replacement and explain why

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