Fill This Form To Receive Instant Help

Help in Homework
trustpilot ratings
google ratings


Homework answers / question archive / The new piece of equipment will have a cost of $1,200,000, and it will be depreciated on a straight-line basis over a period of five years (years 1–5)

The new piece of equipment will have a cost of $1,200,000, and it will be depreciated on a straight-line basis over a period of five years (years 1–5)

Accounting

Flag

The new piece of equipment will have a cost of $1,200,000, and it will be depreciated on a straight-line basis over a period of five years (years 1–5).
The old machine is also being depreciated on a straight-line basis. It has a book value of $200,000 (at year 0) and three more years of depreciation left ($50,000 per year).
The new equipment will have a salvage value of $0 at the end of the project's life (year 5). The old machine has a current salvage value (at year 0) of $300,000.
Replacing the old machine will require an investment in net working capital (NWC) of $20,000 that will be recovered at the end of the project's life (year 5).
The new machine is more efficient, so the incremental increase in earnings before interest and taxes (EBIT) will increase by a total of $500,000 in each of the next five years (years 1–5). (Hint: This value represents the difference between the revenues and operating costs (including depreciation expense) generated using the new equipment and that earned using the old equipment. )
The project's required rate of return is 12%.
The company's annual tax rate is 35%.

Complete the following table and compute the incremental cash flows associated with the replacement of the old equipment with the new equipment.

 

Year 0

Year 1

Year 2

Year 3

Year 4

Year 5

Initial investment $1,200,000             
EBIT               $500,000
Less: Taxes                 
Plus: New depreciation                 
Less: Old depreciation               
Plus: Salvage value             
Less: Tax on salvage             
Less: NWC             
Plus: Recapture of NWC             
Total Net Cash Flow             $565,000   

The net present value (NPV) of this replacement project is   

Option 1

Low Cost Option
Download this past answer in few clicks

2.87 USD

PURCHASE SOLUTION

Already member?


Option 2

Custom new solution created by our subject matter experts

GET A QUOTE