Problem #4 Replacement Project
Assume we are considering the replacement of old equipment with new equipment that has more capacity and is less costly to operate. The characteristics of the old and new equipment are given below:
| Old Equipment | New Equipment | |
| Current book value | $300,000 | |
| Current market value | $550,000 | $850,000 |
| Remaining life | 8 years | 8 years |
| Annual sales | $250,000 | $420,000 |
| Cash operating expenses | $75,000 | $125,000 |
| Annual depreciation | $30,000 | $85,000 |
| Accounting salvage value | $0 | $0 |
| Expected salvage value | $70,000 | $150,000 |
If the new equipment replaces the old equipment, an additional investment of $65,000 in net working capital will be required. The tax rate is 30 percent, and the required rate of return is 8 percent.
(a) Calculate the initial outlay that is the investment in the new equipment plus the additional investment in net working capital less the after-tax proceeds from selling the old equipment
Outlay = __________________________
(b) Calculate the incremental operating cash flows.
Cash Flows = __________________________
(c) Calculate the terminal year incremental after-tax non-operating cash flow.
TNOCF = __________________________
(d) Calculate the NPV and IRR:
Net Present Value (NPV) = __________________________
Internal Rate of Return (IRR) = __________________________
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