Question

Purple Whale Inc. is a company that produces iWidgets, among several other products. Suppose that Purple Whale Inc. considers replacing its old machine used to make iWidgets with a more efficient one, which would cost $1,700 and require $380 annually in operating costs except depreciation. After-tax salvage value of the old machine is $700, while its annual operating costs except depreciation are $1,000. Assume that, regardless of the age of the equipment, Purple Whale Inc.'s sales revenues are fixed at $4,500 and depreciation on the old machine is $700. Assume also that the tax rate is 40% and the project's risk-adjusted cost of capital, r, is the same as weighted average cost of capital (WACC) and equals 10%. , and they are constant over four Based on the data, net cash flows (NCFS) before replacement are years. Although Purple Whale Inc.'s NCFs before replacement are the same over the four-year period, its NCFs after replacement vary annually. The following table shows depreciation rates over four years. Year 1 Year 2 Year 3 Year 4 Depreciation rates 33.33% 44.45% 14.81% 7.41% Complete the following table and calculate incremental cash flows in each year. Hint: Round your answers to the nearest dollar and remember to enter a minus sign if the calculated value is negative. Year o Year 1 Year 2 Year 3 Year 4 $1,700 $700 $4,500 $4,500 $380 $4,500 $380 $4,500 $380 $380 New machine cost After-tax salvage value, old machine Sales revenues Operating costs except depreciation Operating income After-tax operating income Net cash flows after replacement (adding back depreciation) Incremental Cash Flows $ $ $ $ $ $ $ $ $ $ $ $ $ $ Next evaluate the incremental flows by calculating the net present value (NPV), the internal rate of return (IRR), and the modified IRR (MIRR). Assume again that the cost of financing the new project is the same as the WACC and equals 10%. Hint: Use a spreadsheet program's functions or use a financial calculator for this task. NPV IRR MIRR Evaluation Based on the evaluation, replacing the old equipment appears to be a decision because

Answer 1

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02:58 C w ENG Q 18 17-06-2020 24 Х LJ44 fc < . LI LK LL LM LN LO LP LQ LR LS LT 44 45 46 47 48 49 50 51 net cash flows before replacement sales revenue 4500 operating costs 1000 depreciation 700 income before tax 2800 tax 1120 net income 1680 depreciation 700 ANS 1:a cash flow 2380 52 53 54 NOTE 0 1 2 3 4 55 56 year -->> cost of new machine depreciation on new machine 1700 57 566.61 755.65 251.77 125.97 58 ANS 2 : year -->> 0 1 2 3 4 59 60 61 -1700 700 62 4500 4500 4500 4500 63 380 380 380 380 new machine cost after tax salvage sales operating costs operating income after tax operating income net cash flow after replacement incremental cash flows 3553.39 3994.03 [OPERATING INCOME = SALES - COSTS - DEPRECIATIO 3364.35 2018.61 3868.23 2320.94 2396.42 64 65 66 67 2132.03 2698.64 2774.26 2572.71 2522.39 142 [ROUNDED] -1000 319 394 193 ca RATIO PI PBP ARR invest, EAA REPLACEMENTS IRRnpvbeta HPR GMAM EAC MACRS RELEVANT MI-np-ir BETA LEVERED NPV REPLACEMENT BONC ... :

Q C w ENG 02:58 17-06-2020 18 24 Х LS74 fc . LI LK LL LM LN LO LP LQ LR LS LT 58 59 ANS 2 : 0 1 2 3 4 60 61 -1700 700 62 4500 4500 4500 4500 63 year -->> new machine cost after tax salvage sales operating costs operating income after tax operating income net cash flow after replacement incremental cash flows 380 380 380 64 3553.39 3868.23 3364.35 2018.61 65 2132.03 2320.94 66 2698.64 2774.26 2572.71 380 3994.03 [OPERATING INCOME = SALES - COSTS - DEPRECIATION] 2396.42 2522.39 142 [ROUNDED] [INCREMENTAL CASH FLOWS = SUBTRACT 2380 FROM NET CASH FLOW AFTER REPLACEMENT [2380 = CASH FLOW BEFORE REPLACEMENT -1000 319 394 193 67 68 69 70 discount rate NPV 10% -142.39 (=NPV(LM69,L067:LR67)+LN67] 2.22% (=IRR(LN67:LR67)] 5.86% (=MIRR(LN67:LR67,LM69, LM69)] (b) (c) (d) 71 72 IRR MIRR BLANK BAD THE NPV IS NEGATIVE 73 74 75 76 77 78 79 80 81 ܟܘ RATIO PI PBP ARR invest, EAA REPLACEMENTS IRRnpvbeta HPR GMAM EAC MACRS RELEVANT MI-np-ir BETA LEVERED NPV REPLACEMENT BONC ... :