Question

PC Shopping Network may upgrade its modem pool. It last upgraded 2 years ago, when it spent $118 million on equipment with an assumed life of 5 years and an assumed salvage value of $20 million for tax purposes. The firm uses straight-line depreciation. The old equipment can be sold today for $73 million. A new modem pool can be installed today for $159 million. This will have a 3-year life, and will be depreciated to zero using straight-line depreciation. The new equipment will enable the firm to increase sales by $18 million per year and decrease operating costs by $12 million per year. At the end of 3 years, the new equipment will be worthless. Assume the firm's tax rate is 35% and the discount rate for projects of this sort is 12%. (Enter your answers in millions. For example, an answer of $13,000,000 should be entered as 13. Use minus sign to enter cash outflows, if any.)

a.	What is the net cash flow at time 0 if the old equipment is replaced? (Round your answer to 2 decimal places.)
	The net cash flow at time 0    $ million

b.	What is the incremental cash flow in year 1? (Round your answer to 3 decimal places.)
	The incremental cash flow in year 1     $ million

	What is the incremental cash flow in year 2? (Round your answer to 3 decimal places.)
	The incremental cash flow in year 2    $ million

	What is the incremental cash flow in year 3? (Round your answer to 3 decimal places.)
	The incremental cash flow in year 3    $ million

c.	What is the NPV of the replacement project? (Round your answer to 2 decimal places.)
	NPV    $ million

	What is the IRR of the replacement project? (Round your answer to 2 decimal places.)
	IRR    %

d.	Now ignore straight-line depreciation and assume that both new and old equipment are in an asset class with a CCA rate of 30%. PC Shopping Network has other assets in this asset class. What is the NPV of the replacement project? For this part, assume that the new equipment will have a salvage value of $35 million at the end of 3 years. (Round your answer to 2 decimal places.)
	NPV    $ million

Answer 1

a)

Amount in Million $

New Equipment Cash Outflow -159

Old Equipment Cash Inflow 73

Net Cash Flow - 86

The net cash flow at time 0 is - $86 million

b)

The incremental cash flow in year 1     $ 41.21 million

The incremental cash flow in year 2 $ 41.21 million

The incremental cash flow in year 3 $ 41.21 million

c)

NPV is $ 12.98 Million