Continuing with the previous question: The Renecke Co. is planning to replace their printing equipment with a new computerized version that will print more copies at lower cost. The cost of the new machine will be $600,000 including installation. They can sell their fully depreciated existing machine for approximately $100,000. The new machine will require net working capital of $80,000 in period 0. What initial outlay will be required in period 0 for this new equipment? Assume a tax rate of 35%. The new equipment is expected to increase sales by $350,000 but costs are also expected to increase by $100,000. At the end of the five-year project, they could sell the equipment for $50,000. Should they replace the printing equipment? Assume the cost of capital is 16%. Yes, NPV = $108,155,77 Yes, NPV =$92,682.09 $54,930.05 No, NPV = 28,500.22

Equip ment cost = $600,000 intellation cost = $0 Cost capitalised = $600,000 Life of machine(years) = 5 Depreciation = 600000/5 $120,000 Sales 350,000.00 Less Cost 100,000.00 Profit 250,000.00 Less Depreciation $120,000 Net profit 130,000.00 Less Tax @ 35% 45,500.00 Profit after tax 84,500.00 Add Depreciation 120,000.00 CASh Inflow (yearly) 204,500.00 Equipment cost 600,000.00 Net working capital 80,000.00 Less Old machine 100000*(1-35) 65,000.00 Cash out flow (First year) 615,000.00