PC Shopping Network may upgrade its modem pool. It last upgraded 2 years ago, when it spent $105 million on equipment with an assumed life of 5 years and an assumed salvage value of $15 million for tax purposes. The firm uses straight-line depreciation. The old equipment can be sold today for $80 million. A new modem pool can be installed today for $150 million. This will 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 $35 million per year and decrease operating costs by $13 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 13%. Required: a. What is the net cash flow at time 0 if the old equipment is replaced? Note: 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; (ii) 3? Note: Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places. c. What is the NPV of the replacement project? Note: Do not round intermediate calculations. Enter the NPV in millions rounded to 2 decimal places. d. What is the IRR of the replacement project? Note: Do not round intermediate calculations. Enter the IRR as a percent 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
icon
Related questions
icon
Concept explainers
Topic Video
Question

amm. 01.

PC Shopping Network may upgrade its modem pool. It last upgraded 2 years ago, when it spent $105 million on equipment with an
assumed life of 5 years and an assumed salvage value of $15 million for tax purposes. The firm uses straight-line depreciation. The old
equipment can be sold today for $80 million. A new modem pool can be installed today for $150 million. This will 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 $35 million
per year and decrease operating costs by $13 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 13%.
Required:
a. What is the net cash flow at time 0 if the old equipment is replaced?
Note: 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?
Note: Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.
c. What is the NPV of the replacement project?
Note: Do not round intermediate calculations. Enter the NPV in millions rounded to 2 decimal places.
d. What is the IRR of the replacement project?
Note: Do not round intermediate calculations. Enter the IRR as a percent rounded to 2 decimal places.
× Answer is complete but not entirely correct.
102.00 million
a. Net cash flow
$
b. Incremental cash
$
(28.00) ☑
million per
flow
year
c. NPV
$
36.86 million
d. IRR
18.18%
Transcribed Image Text:PC Shopping Network may upgrade its modem pool. It last upgraded 2 years ago, when it spent $105 million on equipment with an assumed life of 5 years and an assumed salvage value of $15 million for tax purposes. The firm uses straight-line depreciation. The old equipment can be sold today for $80 million. A new modem pool can be installed today for $150 million. This will 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 $35 million per year and decrease operating costs by $13 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 13%. Required: a. What is the net cash flow at time 0 if the old equipment is replaced? Note: 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? Note: Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places. c. What is the NPV of the replacement project? Note: Do not round intermediate calculations. Enter the NPV in millions rounded to 2 decimal places. d. What is the IRR of the replacement project? Note: Do not round intermediate calculations. Enter the IRR as a percent rounded to 2 decimal places. × Answer is complete but not entirely correct. 102.00 million a. Net cash flow $ b. Incremental cash $ (28.00) ☑ million per flow year c. NPV $ 36.86 million d. IRR 18.18%
Expert Solution
steps

Step by step

Solved in 6 steps with 8 images

Blurred answer
Knowledge Booster
Capital Budgeting
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
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…
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