### 4. Analysis of a Replacement ProjectFirms often face the decision of whether to continue using their current equipment or replace it with new equipment. Conducting a replacement analysis is essential to determine the most financially advantageous option.**Scenario:** Price Co. is considering replacing an existing piece of equipment. The project details include:- **Cost of New Equipment:** $2,400,000 - The equipment qualifies for 100% bonus depreciation and will be fully depreciated at the start (t = 0).- **Current Equipment Details:** - **Original Purchase:** Under the old tax law, the current machine depreciates on a straight-line method. - **Book Value:** $200,000 at year 0, with four years of depreciation remaining ($50,000 per year). - **Salvage Value (Current Machine):** $300,000 at year 0. - **New Equipment Salvage Value:** $0 at the end of its useful life (year 6).- **Net Operating Working Capital (NOWC):** - An investment of $20,000 is required, recoverable at the project’s end (year 6).- **Efficiency and Earnings Impact:** - The new machine is more efficient, increasing the firm’s incremental earnings before interest and taxes (EBIT) by $300,000 annually over the next six years. - This reflects the difference between the revenues and the operating costs (including depreciation) with the new vs. old equipment.- **Cost of Capital:** 13%- **Annual Tax Rate:** 25%This analysis provides a comprehensive financial outline crucial for making informed decisions regarding equipment replacement. **Educational Website Content:**### Incremental Cash Flow Analysis for Equipment Replacement**Objective:** Complete the following table to compute the incremental cash flows associated with replacing old equipment with new equipment.#### Cash Flow Table Structure:- **Columns Indicate Time Periods:** - Year 0 to Year 5.- **Rows Indicate Cash Flow Items:** - **Initial Investment:** The upfront cost required at Year 0 for acquiring the new equipment. - **EBIT (Earnings Before Interest and Taxes):** The profit generated from operations before deducting interest and taxes, to be assessed yearly from Year 1 to Year 5. - **Taxes:** Amount paid in taxes, calculated yearly. - **Δ Depreciation × T:** The tax shield benefit from depreciation expense, calculated by multiplying the change in depreciation by the tax rate each year. - **Salvage Value:** The estimated resale value of the equipment at the end of its useful life (Year 5). - **Tax on Salvage:** Taxes owed on the difference between the salvage value and the book value at the end of Year 5. - **NOWC (Net Operating Working Capital):** The difference between current assets and current liabilities necessary for operations; subtracted initially and recaptured at the end. - **Recapture of NOWC:** Recovery of the initial increase in NOWC at the project's end (Year 5).- **Total Free Cash Flow:** The net amount of cash generated by the project each year after all expenditures and taxes. #### Calculation Requirement:- Compute each of these elements from Year 0 to Year 5 to determine the net present value (NPV) of the project.#### Question:After completing the table and calculating total free cash flows, determine the Net Present Value (NPV) of the replacement project using one of the following options:- $-\$774,095$- $-\$807,751$- $-\$504,844$- $-\$673,126$**Purpose:** Understanding the incremental cash flows helps in evaluating the financial viability of replacing equipment and its impact on the company’s valuation.

NPV:- A set of cash flows occurring at different dates is given a net present value (NPV) or net…

eed to do replacement analysis to determine which option is the best financial decision for the company. sidering replacing an existing piece of equipment. The project involves the following: equipment will have a cost of $2,400,000, and it is eligible for 100% bonus depreciation so it will be fully depreciated at machine was purchased before the new tax law, so it is being depreciated on a straight-line basis. It has a book value of O (at year 0) and four more years of depreciation left ($50,000 per year). 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 year 0) of $300,000. g the old machine will require an investment in net operating working capital (NOWC) of $20,000 that will be recovered at the e project's life (year 6). machine is more efficient, so the firm's incremental earnings before interest and taxes (EBIT) will increase by a total of O in each of the next six years (years 1-6). Hint: This value represents the difference between the revenues and operating cluding depreciation expense) generated using the new equipment and that earned using the old equipment. ect's cost of capital is 13%. pany's annual tax rate is 25%.

eed to do replacement analysis to determine which option is the best financial decision for the company. sidering replacing an existing piece of equipment. The project involves the following: equipment will have a cost of $2,400,000, and it is eligible for 100% bonus depreciation so it will be fully depreciated at machine was purchased before the new tax law, so it is being depreciated on a straight-line basis. It has a book value of O (at year 0) and four more years of depreciation left ($50,000 per year). 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 year 0) of $300,000. g the old machine will require an investment in net operating working capital (NOWC) of $20,000 that will be recovered at the e project's life (year 6). machine is more efficient, so the firm's incremental earnings before interest and taxes (EBIT) will increase by a total of O in each of the next six years (years 1-6). Hint: This value represents the difference between the revenues and operating cluding depreciation expense) generated using the new equipment and that earned using the old equipment. ect's cost of capital is 13%. pany's annual tax rate is 25%.

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

See similar textbooks

Similar questions

ha
Cadet Inc. is considering the purchase of new equipment that will automate production and thus reduce labor costs. Cadet made the following estimates related to the new machinery: (Click the icon to view the information.) Present Value of $1 table Present Value of Annuity of $1 table Future Value of $1 table Future Value of Annuity of $1 table Read the requirements. C Requirement 1. Calculate (a) net present value, (b) payback period, (c) discounted payback period, and (d) internal rate of return. a. Net present value. (Round intermediary calculations to the nearest whole dollar. Use factors to three decimal places, X.XXX, and use a minus sign or parentheses for a negative net present value. Enter the net present value of the investment rounded to the nearest whole dollar.) The net present value is Requirements 1. Calculate (a) net present value, (b) payback period, (c) discounted payback period, and (d) internal rate of return. 2. Compare and contrast the capital budgeting methods in…
if a company is considering buying a system that costs 450,000 with an estimated 10-year life and a salvage value of 70,000, the estimated operating results with the new machine are, incremental revenue = 180,000, incremental expenses = 123,000 which is made up by, expenses other than depreciation = 85,000, depreciation (straight-line basis) = 38,000, and incremental income = 57,000, and all revenue and expenses other than depreciation use cash, how do I find the annual net cash flow, time of the payback period, return on investment percentage, and the Net present value, discounted at an annual rate of 6% (present value of $1 due in 10 years, discounted at 6%, is 0.558; present value of $1 received annually for 10 years, discounted at 6%, is 7.360)?
hh
Thomson Media is considering some new equipment whose data are shown below. The equipment has a 3-year tax life and would be fully depreciated by the straight-line method over 3 years, but it would have a positive pre-tax salvage value at the end of Year 3, when the project would be closed down. Also, additional net operating working capital would be required, but it would be recovered at the end of the project's life. Revenues and other operating costs are expected to be constant over the project's 3-year life. What is the project's NPV? Do not round the intermediate calculations and round the final answer to the nearest whole number. WACC 10.0% Net investment in fixed assets (depreciable basis) $70,000 Required net operating working capital $10,000 Straight-line depreciation rate 33.333% Annual sales revenues $57,000 Annual operating costs (excl. depreciation) $30,000 Expected pre-tax salvage value $5,000 Tax rate 35.0% Choices: $–6,092 $-6,518 $-7,371 $-6,213 $-7,005 Give typing…
Egy Company is considering three capital expenditure projects. Relevant data for the projects are as follows Project Investment 22A $243.300 23A 274.200 24A 280,500 Project 22A Annual Income is constant over the life of the project. Each project is expected to have zero salvage value at the end of the project. Iggy Company uses the straight-line method of depreciation Click here to view the factor table (a) 23A Annual Income $16.860 Determine the internal rate of return for each project. (Round answers O decimal places, eg: 13%. For calculation purposes, use 5 decimal places as displayed in the factor table provided) 24A 20,730 15,700 (b) Life of Project 6 years 9 years 7 years Internal Rate of Return If Iggy Company's required rate of return is 11%, which projects are acceptable The following project(s) are acceptable
ss
Please see image for question to solve.
Two altemnative machines will produce the same product, but one is capable of higher-quality work, which can be expected to return greater revenue. The following are relevant data. Determine which is the better alternative, assuming repeatability and using SL depreciation, an income-tax rate of 25%, and an after-tax MARR of 10%. Capital investment Life Machine A $20,000 12 years $3,500 Calculate the AW value for the Machine A. AWA (10%) = $(Round to the nearest dollar.) Terminal BV (and MV) Annual receipts Annual expenses Click the icon to view the interest and annuity table for discrete compounding when the MARR is 10% per year. Machine B $34,000 9 years $2,000 $144,000 $142,000 $190,000 $163,000
HappyDay is planning to invest $20 million and acquire a new production line at the beginning of Year 3. Also, the company has intents to change the depreciation policy in order to manage the costs of production and income tax expenses better. Your new boss asks you to calculate depreciation expenses using straight-line, double-declining balance and units-of-production methods to determine which of the methods is better. The new asset is expected to have a 10-year useful life. The total production is estimated at 500,000 tons. With respect to the new asset, HappyDay is expecting to generate the following results in Years 3-5. Year 3 Year 4 Year 5 Expected amount of production, tons 45,000 65,000 60,000 Net Sales, thousand $ 85,000 120,000 110,000 Expenses (before depreciation and income tax), thousand $ 45,000 80,000 73,000 Income tax rate, % 30 30 30 Answer the following question 2. Compute HappyDay’s Total Expenses, Income…
еВook You must evaluate the purchase of a proposed spectrometer for the R&D department. The purchase price of the spectrometer including modifications is $270,000, and the equipment will be fully depreciated at the time of purchase. The equipment would be sold after 3 years for $49,000. The equipment would require a $12,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $20,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 25%. a. What is the initial investment outlay for the spectrometer after bonus depreciation is considered, that is, what is the Year 0 project cash flow? Enter your answer as a positive value. Round your answer to the nearest dollar. b. What are the project's annual cash flows in Years 1, 2, and 3? Do not round intermediate calculations. Round your answers to the nearest dollar. Year 1: $ Year 2: $ Year 3: $ c. If the WACC is 12%,…

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS