Company A considers the old machine that was initially used and replaces it with a new machine, that is, replaces the old machine. It is understood that the current book value of this old machine is 600,000 yuan (straight-line depreciation), and it can be used for 3 years. If it is sold now, it can be sold for 400,000 yuan. The cost of the new machine is 2 million yuan, and it is expected to be used for 3 years. The company uses the average-year method to list the depreciation expenses (assuming the residual value is 500,000 yuan). The new machine will be depreciated in three years and can be sold for 600,000 yuan. In order to use this machine, it is necessary to increase the net working capital of 200,000 yuan (recoverable upon expiration of the period of use). This new machine company can save the company $1.5 million in annual cost savings (cash outflow). Assuming that the required rate of return on the company's common stock is 10%, and the tax rate is 20%.

1. What is the annual net cash flow? please provide the calculation in detail

2. The soil asked company A if it would decide to replace the old one with a new one. what is the reason?

Answer rating: 100% (QA)

Lets calculate the Net Present Value NPV of both options and determine whether Company A should repl... View the full answer