Question: XYZ co. is evaluating to replace the existing two year old computers that cost $40million with an original life of 5 years. The cost of

XYZ co. is evaluating to replace the existing two year old computers that cost $40million with an original life of 5 years. The cost of the new computers is $90 million. The new computers will be depreciated to zero book value using straight line over 3 years. The existing computers has a salvage value of $5million and a book value of $24million. The new computers will reduce operating expenses by $38 million a year. The new computers will have a salvage value of $9 million and a book value of zero in three years. XYZ has an income tax rate of 25%. Assume XYZ has a cost capital of 12%

1. Determine the initial cash flow of investment at time 0

2. Determine the operating cash flows of the investment for the next three years

3.Determine the terminal cash flow of the investment

4.Determine the net present value of the replacement? Should this replacement be taken? Explain.

5. Determine the internal rate of return of the replacement? Should the replacement be taken? Explain.

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