Question

Suppose we are thinking about replacing an old computer with a new one. The old one cost us $1,740,000; the new one will cost, $2,105,000. The new machine will be depreciated straight-line to zero over its five-year life. It will probably be worth about $495,000 after five years. The old computer is being depreciated at a rate of $384,000 per year. It will be completely written off in three years. If we don’t replace it now, we will have to replace it in two years. We can sell it now for $585,000; in two years, it will probably be worth $171,000. The new machine will save us $365,000 per year in operating costs. The tax rate is 24 percent, and the discount rate is 9 percent. a-1. Calculate the EAC for the the old computer and the new computer. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) a-2. What is the NPV of the decision to replace the computer now? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Α. B C D E F G H 1 Particulars 2 1 2 3 4 5 -2105000 365000 87600 277400 101040 378440 365000 87600 277400 101040 378440 365000 87600 277400 101040 378440 3 Initial investment 4 Savings 5 Less: Tax @ 24% 6 After tax cash flows 7 Add: Depreciation 8 Operating cash flows 9 Add: Salvage value 10 Net cash flow 11 FVIF @9% 12 PV of cash flow 13 NPV 14 PVIFA (9%,5) 15 EAC of New Computer 365000 365000 87600 87600 277400 277400 1010401 101040 378440 378440 287614 378440 666054 1.41158 1.53862 268096 432890 -2105000 378440 1.09 347193 378440 1.1881 318525 378440 1.29503 292225 -2105000 -446070.8 1.06624 0.52632 0.27701 0.14579 0.07673 0.04039 -418359.5905

A B 1 Particulars 2 3 Initial investment -2105000 4 Savings 365000 365000 365000 365000 365000 5 Less: Tax @ 24% =C4*24% =D4*24% =E4*24% =F4*24% =G4*24% 6 After tax cash flows =C4-C5 =D4-D5 =E4-E5 =F4-F5 =G4-65 7 Add: Depreciation =2105000/5*24% =2105000/5*24% =2105000/5*24% =2105000/5*24% =2105000/5*24% 8 Operating cash flows =C6+C7 =D6+D7 =E6+E7 =F6+F7 =G6+G7 9 Add: Salvage value =378440*(1-24%) 10 Net cash flow =B3 =C8+C9 =D8+D9 =E8+E9 =F8+F9 =G8+G9 11 FVIF @9% =(1+9%)^B2 =(1+9%)^C2 =(1+9%)^D2 =(1+9%)^E2 =(1+9%)^F2 =(1+9%)^G2 12 PV of cash flow =B10/B11 =C10/C11 =D10/D11 =E10/E11 =F10/F11 =G10/G11 13 NPV =SUM(B12:412) 14 PVIFA (9%,5) =1/(1+0.9)^C2 =1/(1+0.9)^D2 =1/(1+0.9)^2 =1/(1+0.9)^F2 =1/(1+0.9)^G2 15 EAC of New Computer =B13/H14 =SUM(C14:614)

A 1 Particulars 2. 3 Initial investment 4 Operating cash flows 5 Add: Salvage value 6 Net cash flow 7 FVIF @9% 8 PV of cash flows 9 NPV 10 PVIFA (9%,2) 11 EAC of old computer в с D E Year 1 2 -721840 9216092160 513960 -72184092160 606120 11 1.09 1.1881 -721840 84550.5 510159 -127130 | 0.91743 0.841680 1.75911| -72269.71483

B Α 1 Particulars Year 2 =-(586000+((384000*3)-586000)*24%) 3 Initial investment Operating cash flows 5 Add: Salvage value 6 Net cash flow 7 FVIF @9% 8 PV of cash flows 9 NPV 10 PVIFA (9%,2) 11 EAC of old computer =C4 =384000*24% =384000*24% =171000+((384000)-171000*24%) =D4+D5 =(1+9%)^C2 =(1+9%)^D2 =C6/C7 =D6/D7 =B3 =(1+9%)^B2 =B6/B7 =SUM(B8:08) =SUM(C10:010) =1/(1+9%)^C2 =1/(1+9%)^D2 =B9/E10

~ m A B C D 1 Year New machine Old machine Difference PVAF @9% PV of Cash Flows 2 0 -2105000 -721840 -1383160 1 -1383160 378440 92160 286280 0.917431193 262642.2018 2 3 78440 606120 -227680 0.841679993 -191633.7009 378440 378440) 0.77218348 292225.1162 378440 378440 0.708425211 268096.4369| 666054 666054 0.649931386 432889.3996| 8 Net present value -318940.5464 Nm on 5

A B D E 1 Year New machine old machine Difference PVAF @9% 20 -2105000 -721840 =B2-C2 =1/(1+9%)^A2 3 1 378440 92160 =B3-c3 =1/(1+9%)^A3 42 378440 606120 =B4-C4 =1/(1+9%)^A4 5 3 378440 =B5-C5 =1/(1+9%)^A5 6 4 378440 =B6-C6 =1/(1+9%)^A6 7 5 -666054 =B7-C7 =1/(1+9%)^AZ 8 Net present value PV of Cash Flows =D2*E2 =D3*E3 =D4*E4 =D5* E5 =D6*E6 =D7*E7 =SUM(F2:F7)