i t Ch 12: Assignment Cash Flow Estimation and Risk Analysis Analysis of a replacement project times firms will need to decide if they want to continue to use their current equipment or replace the equipment with newer eqaipment The company will need to do replacement analysis to decermine which option is the best financial decision for the ones Co. is considering replacing an existing piece of ecuipment. The project involves the folowing The new equipment wil have a cost of 600,000, and it The oid ($50,000 per year). The new equipment wi heve a salvage value of $o at the end of the project's Iife (year 6). The oid machine has a current 300,000 . be depreciated on a straight-Ine tesis over a period of six yeas Cyans 1-6). machine is aso being depreciaced on a streight-Iine basis. Bt has a book value o $200,000 (at year 0) and four more years of depreciation let salvage vaue (ot year 0) of resurrninvestnert in ret working apk (NWC) of S20,000 that be recovered at the end of the project's lfe (year The new machine is more efficien, so the firm's incremental eamings befone interest and taxes (EBIT) will Increase by a total of $700,000 in each of the next six years (years 1-6) Mint: This value represents the difference between the revenues and operacing costs (indluding depreciation experse) penerated using the new equipment and that earned using the oid . The project's cost of capitai ls . The company's nnual tax fatu s 35%. Completse the folowing table and c compute the incremental cash fows associeted with the replacement of the oid equipment with the new equipment Tear o Year 2 niltial Invesment $700,000 Oid depreciation Tax on salvage Recapture of NWC Salvage value Total free The net present vlun(p o this replacement project is MacBook Air 6 8 9 Search w this course h 12: Assignment- Cash Flow Estimation and Risk Analysis Replacing the old machine will require an investment in net working capital (NWO) of $20,000 that: wil be recovered a: the end of the The new machine is more efficient, so the firm's incremental earnings before interest and next six years (years 1-6), Hint: This value represets the difference between the r generated using the new equipment and that earned using the old equipment. taxes (EBIT will increse by a total of $700,000 in each of revenues and operating costs (including depreciadion expense) . The project's cost o/capical is 13%. The company's annual tax rate is 35%. Complete the folowing table and compute the incremental cash flows associated with the replacement of the old equipment with the new Year 0 Year 1 Year 2 Year 4 Year S Year 6 Initial investment 700,000 Taxes + New depreciation - Old depreciation + Salvage value - Tax on salvage + Recapture of NWC Total free cash owY 555,000 The net present value (NPV) of this replacement project is: O $1,293,392 O $1,724,523 O $1,983,20 Continue witha MacBook Air 5 7