a. What is the net cash flow at time O if the old equipment is replaced? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) b. What are the incremental cash flows in years (i) 1; (ii) 2; (iii) 3? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) c. What is the NPV of the replacement project? (Do not round intermediate calculations. Enter the NPV in millions rounded to 2 decimal places.)
a. What is the net cash flow at time O if the old equipment is replaced? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) b. What are the incremental cash flows in years (i) 1; (ii) 2; (iii) 3? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) c. What is the NPV of the replacement project? (Do not round intermediate calculations. Enter the NPV in millions rounded to 2 decimal places.)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:PC Shopping Network may upgrade its modem pool. It last upgraded 2 years ago, when it spent $85 million on equipment with an
assumed life of 5 years and an assumed salvage value of $25 million for tax purposes. The firm uses straight-line depreciation. The old
equipment can be sold today for $70 million. A new modem pool can be installed today for $150 million. This willI 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 $23 million
per year and decrease operating costs by $11 million per year. At the end of 3 years, the new equipment will be worthless. Assume the
firm's tax rate is 30% and the discount rate for projects of this sort is 10%.
Required:
a. What is the net cash flow at time O if the old equipment is replaced? (Negative amounts should be indicated by a minus sign. Do
not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)
b. What are the incremental cash flows in years (i) 1; (ii) 2; (iii) 3? (Do not round intermediate calculations. Enter your answer in
millions rounded to 2 decimal places.)
c. What is the NPV of the replacement project? (Do not round intermediate calculations. Enter the NPV in millions rounded to 2
decimal places.)
d. What is the IRR of the replacement project? (Do not round intermediate calculations. Enter the IRR as a percent rounded to 2
decimal places.)
Expert Solution
Step 1
NPV:
It is the present worth of the project's annual cash flows and the initial cost. If the NPV of the project is positive, then the project generates value and should be accepted. If the NPV of the project is negative, then the project destroys value and should not be accepted.
NOTE:
- As per our policy, we only answer up to three sub-questions. Therefore, the first three questions are answered. Please repost the remaining questions.
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