TelCo must decide whether to replace a computer system with a new model. TelCo forecasts net before

Question:

TelCo must decide whether to replace a computer system with a new model. TelCo forecasts net before tax cost savings from the new computer over five years as given below (in $000). It has a 12 percent cost of capital, a 35 percent tax rate, and uses straight line depreciation.

(a). The new computer costs $1 million but TelCo is eligible for a 15 percent investment tax credit (ITC) in the first year. The ITC reduces Telco's taxes by an amount equal to 15 percent of the equipment's purchase price. In addition, the old computer can be sold for $450,000. If the old computer originally cost $1.25 million and is three years old (depreciable, not economic, life is five years), what is the net investment required in the new system? Assume that there was no ITC on the old computer and that both computers are being depreciated to a zero salvage value.
(b). Estimate the incremental operating cash flows associated with the new system

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...