Question

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. Price Co. is considering replacing an existing piece of equipment. The project involves the following: The new equipment will have a cost of $9,000,000, and it will be depreciated on a straight-line basis over a period of six years (years 1-6) The old machine is also 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 working capital (NWC) of $60,000 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 $400,000 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 30%

Answer 1

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projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Data Review View Add-Ins Formulas - 2x 11 A = = V General File Home Insert Page Layout % Cut Calibri Ea Copy Paste B I U D Format Painter Clipboard Font A A = E Wrap Text Merge Merge & Center Center SF 4:0 .00 8. Insert Delete Format $ - % % Number Conditional Format Formatting as Table Styles Cell Styles Σ AutoSum : A Fill Sort & 2 Clear Filter Editing Find & Select Alignment Cells BB105 BA BB BG BH BI BJ B K BL BM 56 BN 1 2 3 2 105 106 107 4 108 400000 -120000 435000 400000 -120000 435000 400000 - 120000 435000 400000 120000 435000 400000 -120000 450000 400000 - 120000 450000 109 110 111 LESS ADD ADD LESS LESS ADD BC BD BE BE 0 INITIAL INVESTMENT -9000000 EBIT TAXES 30% A DEPRECIATION * TAX RATE (SEE NOTE] SALVAGE VALUE 300000 TAX ON SALVAGE -30000 NWC -60000 RECAPTURE OF NWC TOTAL NET CASH FLOW -8790000 PV FACTOR @13% PV OF CFAT -8790000 112 113 114 115 B 15000 0.8850 632743.36 15000 15000 15000 0.7831 0.6931 0.6133 559949.88 495530.87 438522.89 60000 730000 790000 0.5428 0.4803 396214.75 379451.64 -5887587 NPV 116 A*B 117 118 119 NPV = -5887587 120 121 122 123 124 125 HIN Red NOTE: TAX ON SALVAGE VALUE SALVAGE VALUE - BOOK VALUE = PROFIT ON SALE 300000-200000 = 100000 TAX IS ON 100000 X 30% = 30000 NOTE: DEPRECIATION ON NEW MACHINE = 9000000/6 = 1500000 DEPRECIATION ON OLD MACHINE = 50000 FOR 4 YEARS, INCREMENTAL DEPRECIATION * TAX = 1500000 - 50000 = 1450000 X 30% = 435000 FOR LAST 2 YEARS = 1500000 X 30% = 450000 BETA LEVERED REPLACEMENT BOND OPTION TO WAIT STEIN indiffEPS EBIT LEASE STRAIGHT LINE GOLF IRR MACRS BASE CASE SENSITIVITY Sheeti BOI 120% 6 . B * * 0 prel NPV_RELEVANT ferences - ENG 22-11-2019