**Replacing an Old Computer: Financial Analysis****Scenario:**We are considering replacing an old computer with a new one. The old computer initially cost $1,680,000, and the new one will cost $2,027,000. The new machine will depreciate straight-line to zero over its five-year life, and it is expected to be worth $450,000 after five years.**Depreciation Details:**- The old computer depreciates at $360,000 per year and will be completely written off in three years.- If not replaced now, it will need replacement in two years.- Current resale value: $558,000; in two years: $162,000.- The new machine will save $378,000 per year in operating costs.**Financial Metrics:**- Tax rate: 21%- Discount rate: 12%**Required Calculations:**- **(a-1)** Calculate the Equivalent Annual Cost (EAC) for both the old and new computers. - Negative values should be indicated with a minus sign. - Round answers to two decimal places (e.g., 32.16).- **(a-2)** Determine the Net Present Value (NPV) of replacing the computer now. - Negative values should be indicated with a minus sign. - Round answer to two decimal places (e.g., 32.16).**Results:**- **Old Computer EAC:** Not provided in the table.- **New Computer EAC:** Not provided in the table.- **NPV:** -$64,373.05This analysis assists in evaluating the financial implications of replacing an old computer system with a new one based on depreciation, cost savings, tax considerations, and overall value.

Net present value (NPV):Net Present Value (NPV) is a financial concept that measures the value of a…

Answered: Suppose we are thinking about replacing…

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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Suppose we are thinking about replacing an old computer with a new one. The old one cost us $1,620,000; the new one will cost, $1,949,000. The new machine will be depreciated straight-line to zero over its five-year life. It will probably be worth about $405,000 after five years. The old computer is being depreciated at a rate of $336,000 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 $531,000; in two years, it will probably be worth $153,000. The new machine will save us $363,000 per year in operating costs. The tax rate is 23 percent, and the discount rate is 10 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…
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Suppose we are thinking about replacing an old computer with a new one. The old one cost us $1,960,000; the new one will cost, $2,531,000. The new machine will be depreciated straight-line to zero over its five-year life. It will probably be worth about $660,000 after five years. The old computer is being depreciated at a rate of $472,000 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 $684,000; in two years, it will probably be worth $204,000. The new machine will save us $413,000 per year in operating costs. The tax rate is 25 percent, and the discount rate is 8 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 - What is the NPV of the decision to replace the computer now? (A negative answer should be…
Suppose we are thinking about replacing an old computer with a new one. The old one cost us $1,840,000; the new one will cost, $2,225,000. The new machine will be depreciated straight-line to zero over its five-year life. It will probably be worth about $570,000 after five years. The old computer is being depreciated at a rate of $424,000 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 $630,000; in two years, it will probably be worth $186,000. The new machine will save us $398,000 per year in operating costs. The tax rate is 24 percent, and the discount rate is 11 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?…
Although the Chen Company's milling machine is old, it is still in relatively good working order and would last for another 10 years. It is inefficient compared to modern standards, though, and so the company is considering replacing it. The new milling machine, at a cost of $106,000 delivered and installed, would also last for 10 years and would produce after-tax cash flows (labor savings and depreciation tax savings) of $19,100 per year. It would have zero salvage value at the end of its life. The project cost of capital is 11%, and its marginal tax rate is 25%. Should Chen buy the new machine? Do not round intermediate calculations. Round your answer to the nearest cent. Negative value, if any, should be indicated by a minus sign. NPV: $ Chen purchase the new machine.

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