Question

Keep the Highest: 1.8/2 1.8 Attempts: 4. Analysis of a replacement project At times firms will need to decide if they want to continue to use their current equipment or replace the equipment with newer equipment. The company will need to do replacement analysis to determine which option is the best financial decision for the company. Johnson Co. is considering replacing an existing piece of equipment. The project involves the following: The new equipment will have a cost of $600,000, and it is eligible for 100% bonus depreciation so it will be fully depreciated at t = 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 $500,000 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.

Answer 1

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345 346 347 350 projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins - 2x % Cut Σ AutoSum : A Calibri 11 A A = = = V Wrap Text General Ea Copy Fill 2 m Paste B I U - D SF A Merge Merge & Center Center Format Painter $ - % % 4:0 .00 8.9 Conditional Format Cell Insert Delete Format Sort & Find & Formatting as Table Styles 2 Clear Filter Select Clipboard Font Alignment Number Styles Cells Editing A0344 AN ΑΟ - AP AQ AR AS AT AU AV AW AX AY AZ 5 344 0 1 1 2 3 4 5 6 INITIAL INVESTMENT (SEE NOTE] -450000 EBIT 500000 500000 500000 500000 500000 500000 348 TAXES 25% -125000 -125000 -125000 -125000 -125000 -125000 349 A DEPRECIATION * TAX RATE -12500 -12500 -12500 - 12500 0 0 351 SALVAGE VALUE 300000 352 TAX ON SALVAGE -25000 353 NWC -50000 RECAPTURE OF NWC 50000 355 A TOTAL FREE CASH FLOW -225000 362500 362500 362500 362500 375000 425000 356 B PV FACTOR @13% 0.8850 0.7831 0.6931 0.6133 0.5428 0.4803 357 A*B PV OF CFAT -225000 320796.46 283890.67 251230.68 222328.04 203534.98 204135.37 1260916 358 NPV 359 NPV = 1260916 360 361 NOTE AS IT IS A CASE OF 100% BONUS DEPRECIATION 362 INITIAL INVESTMENT = AFTER TAX COST OF MACHINE = 600000*(1-0.25) = 450000 363 NOTE as new machine is fully depreciated in beginning, change in depreciation = depreciation of old machine x tax rate = 50000 x 25% = 12500 364 i nvest, EAA MI-np-ir_REPLACEMENT S HPR GMAM EAC MACRS NPV RELEVANT BETA LEVERED REPLACEMENT BOND OPTION TO WAITSTEIN indiffEPS EBIT LEASE STRAIGHT < 0 Rea ferences BO! 120% - ELEB * * QENG 22-11-2019 354 H