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Ch $12-$ Assignment $-$ Cash Flow Estimation and Risk Analysis

The new equipment will have a cost of $$1,800,000,$ and it is eligible for $100\%$ bonus depreciation so it will be fully depreciated at $t=0.$

The old machine was purchased before the new tax law, so it is being depreciated on a straight$-$line basis. It has a book value of $$200,000($at year $0)$ and four more years of depreciation left $($ $$50,000$ per year$).$

The new equipment will have a salvage value of $$0$ at the end of the project's life $($year $6).$ The old machine has a current salvage value $($at year $0)$ of $$300,000.$

Replacing the old machine will require an investment in net operating working capital $($NOWC$)$ of $$50,000$ that will be recovered at the end of the project's life $($year $6).$

The new machine is more efficient, so the firm's incremental earnings before interest and taxes $($EBIT$)$ will increase by a total of $$600,000$ in each of the next six years $($years $1-6).$ Hint: This value represents the difference between the revenues and operating costs $($including depreciation expense$)$ generated using the new equipment and that earned using the old equipment.

The project's cost of capital is $13\%.$

The company's annual tax rate is $25\%.$

Complete the following table and compute the incremental cash flows associated with the replacement of the old equipment with the new equipment.