Question: Question 6: ABC Co. is considering replacing an old computer with a new one. The old one was purchased 1 year ago for $600,000. It

Question 6: ABC Co. is considering replacing an old computer with a new one. The old one was purchased 1 year ago for $600,000. It is depreciated strait-line to zero over 6 years. It is expected to be worth $10,000 at the end of its 6-year life. If ABC sells it today, ABC should receive $300,000 for the computer. The new computer costs $750,000. It has a life of 5 years and will be depreciated strait-line to zero over its 5-year life. It is expected to be worthless at the end of its 5-year life. The new generator is expected to reduce the operating costs by $200,000 per year. There is no change in net working capital. The discount rate of this replacement project is 15%, and the tax rate is 40%.

Year	1	2	3	4	5
Cost Savings
Depreciation
New
Old
Increm. Dep
EBIT
Taxes
NI

Year 0

Cost of new computer =

After-tax cash flows of old computer sale =

Incremental net capital spending =

Years 1-4

Operating cash flow =

Year 5

Operating cash flow =

After-tax cash flows of old computer sale =

Year	0	1	2	3	4	5
OCF
NCS
DNWC
CFFA

NPV =

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