A firm is considering replacing its computer system with a new one. The new syst

Question

A firm is considering replacing its computer system with a new one.  The new system is expected to have an annual operational cost savings of $62,564.  The initial cost of the new system is $173,314 and it will last for six years. The 3-year MACRS depreciation method will be used on the new computer system. The current computer system has annual depreciation of $5,196. Both systems will be worthless in six years. The new system requires an initial investment of $3,185 in net working capital, which will be recovered at the end. The marginal tax rate is 0.34 and the annual required return is 0.12. What is the incremental cash flow of this replacement project in year six (the end of the project's life)?

Answer format: Round to two decimal places. Do not use dollar sign or thousands separators.

Explanation / Answer

New system should be accepted

Year Depreciation on new system Depreciation on old system Incremental Depreciation Incremental Saving Incremental Saving Incremental Saving after Tax Incremental cash flow from operation Cashflow from WC Cost of new system Net incremental cash flow 0 -3185 -173314 -176499 1 110728 5196 105532 62564 -42968 -28358.9 77173.12 77173.12 2 41724 5196 36528 62564 26036 17183.76 53711.76 53711.76 3 13908 5196 8712 62564 53852 35542.32 44254.32 44254.32 4 6954 5196 1758 62564 60806 40131.96 41889.96 41889.96 5 0 5196 -5196 62564 67760 44721.6 39525.6 39525.6 6 0 5196 -5196 62564 67760 44721.6 39525.6 3185 42710.6

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