Singular Steel is a small, steel company. The company is evaluating a replacement decision based on...

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Singular Steel is a small, steel company. The company is evaluating a replacement decision based on incremental cash-flows. The current machine has a salvage value (e.g. market value) of €3 million. Its current book value is €1.5 million. If not sold, the old machine will require annual maintenance costs of If not sold, the old machine will require annual maintenance costs of €850,000. Depreciation on the old machine is €300,000. At the end of 5 years, it is expected to have a market value of 140,000 and a book value 0. A replacement machine costs €4.8 million now and requires annual maintenance expenditures of €350,000 during its economic life of five years. At the end of project life the new machine will have a market value of €900 000 but its fully depreciated in the books using straight-line method. The corporate tax rate is 20% and the cost of capital is 8%. One can assume that the company can generate profits enough to fully exploit the depreciation tax shields. Evaluate based on NPV and IRR if the company should make the replacement now. Iti s suggested to use Excel to solve the exercise. Moreover, try to find the incremental cash-flows from the replacement (e.g., you should not evaluate the old and new machines separately) Singular Steel is a small, steel company. The company is evaluating a replacement decision based on incremental cash-flows. The current machine has a salvage value (e.g. market value) of €3 million. Its current book value is €1.5 million. If not sold, the old machine will require annual maintenance costs of If not sold, the old machine will require annual maintenance costs of €850,000. Depreciation on the old machine is €300,000. At the end of 5 years, it is expected to have a market value of 140,000 and a book value 0. A replacement machine costs €4.8 million now and requires annual maintenance expenditures of €350,000 during its economic life of five years. At the end of project life the new machine will have a market value of €900 000 but its fully depreciated in the books using straight-line method. The corporate tax rate is 20% and the cost of capital is 8%. One can assume that the company can generate profits enough to fully exploit the depreciation tax shields. Evaluate based on NPV and IRR if the company should make the replacement now. Iti s suggested to use Excel to solve the exercise. Moreover, try to find the incremental cash-flows from the replacement (e.g., you should not evaluate the old and new machines separately)

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To evaluate the replacement decision based on incremental cashflows we need to calculate the net pre... View the full answer