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8. Replacement analysis Aa Aa E Free Spirit Industries Inc. is a company that produces iWidgets, among several other productsYear 1 Year 2 Year 3 Year 4 Year 0 $2,000 $400 $2,500 $280 $2,500 $280 $2,500 $280 $2,500 $280 New machine cost After-tax sal

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Answer #1
Net Cash Flows before Replacements
Particulars $
Sale Revenues 2500
Annual Operating Cost -1200
Earning Before Depreciation and Tax 1300
Depriciation -400
Earning BeforeTax 900
Tax @ 40% -360
Earning After Tax 540
Add:- Depriciation 400
Net Cash Flows before Replacement 940
Increamental cash Flows
Year 0 Year 1 Year 2 Year 3 Year 4
New Machine Cost -2000
After Tax Salvage Value , old machine 400
Sales Revenues 2500 2500 2500 2500
Operating Costs except Depriciation -280 -280 -280 -280
Depriciation (As per rates given on $ 2000 cost) -666.60 -889.00 -296.20 -148.20
Operating Income 1553.4 1331 1923.8 2071.8
Tax @ 40% -621.36 -532.4 -769.52 -828.72
After Tax Operating Income 932.04 798.6 1154.28 1243.08
Add: - Depriciation 666.60 889.00 296.20 148.20
Net Cash Flows after Replacements 1598.64 1687.60 1450.48 1391.28
Cash Flows Before Replacements -940.00 -940.00 -940.00 -940.00
Incremental Cash Flows -1600 658.64 747.60 510.48 e451.28
Computation of NPV
Year Cash Flow P.V. Factor Present Value
[Inflow/(outflow] [@10 %] [Cash Flow*P.V. Factor]
0 -1600 1.0000 -1600.00
1 658.64 0.8403 553.46
2 747.6 0.7062 527.96
3 510.48 0.5934 302.92
4 451.28 0.4987 225.05
Net Present Value 9.39
Computation of IRR
IRR is a rate whrere the NPV of the project is zero. Since project NPV is positive, The IRR will be higher than the discounting rate. The NPV while discouting with 20% rate is -18.97 while discounting at 19 % discount rate is 9.39. Therefore the IRR will be
IRR= Ra +         NPVa              *(rb-ra)
    NPVa-NPVb
(where a represents lower rate and b represents higher rate)
= 0.19 +         9.39              *(.20-.19)
    9.39-(-18.97)
= .19+0.0033
= 0.1933
= 19.33%
Year Cash Flow F.V. Factor till the end of Project Future Value
[Inflow/(outflow] [@10 %] [Cash Flow*F.V. Facotr]
1 658.64 1.3310 876.65
2 747.6 1.2100 904.60
3 510.48 1.1000 561.53
4 451.28 1.0000 451.28
Future Value of Cash Inflows 2794.06
Initial Investment 1600.00
MIRR = (FVCI/PVCO)1/n - 1
Where
FVCI =sum of future values of all net cash flows at the end of the project
PVCO = initial investment
n = is the number of periods
MIRR= (2794.06/1600)1/4 - 1
(1.746288)1/4 - 1
0.1496 or Say 14.96%
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