At times firms will need to decide if they want to continue to use their current

Question

At times firms will need to decide if they want to continue to use their current equipment or replace the equipment with newer equipment. The company will need to do replacement analysis to determine which option is the best financial decision for the company. Johnson Co. is considering replacing an existing piece of equipment. The project involves the following: The    new equipment will have a cost of $1, 200,000, and it will be depreciated on a straight-line basis over a period of six years (years 1-6). The old machine is also being depreciated on a straight-line basis. It has a book value of $200,000 (at year 0) and four 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 6). 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 $50,000 that will be recovered at the end of the project's life (year 6). The new machine is more efficient, so the firm's incremental earnings before interest and taxes (EBIT) will increase by a total of $400,000 in each of the next six years (years 1-6). The project's cost of capital is 13%. The company's annual tax rate is 30%. Complete the following table and compute the incremental cash flows associated with the replacement of the old equipment with the new equipment. Complete the following table and compute the incremental cash flows associated with the replacement of the old equipment with the new equipment. The net present value (NPV) of this replacement project is: $976, 939 $814, 116 $936, 233 $610, 587

Explanation / Answer

calculation of npv

answer and working stpes are here please check it ur answers once again

particulars year 0 year 1 year 2 year 3 year 4 year 5 year 6 intial investment -1200000 EBIT 400000 400000 400000 400000 400000 400000 less taxes -120000 -120000 -120000 -120000 -120000 -120000 add new depreciation 200000 200000 200000 200000 200000 200000 less old depreciation -50000 -50000 -50000 -50000 add salvagevalue 300000 less tax on salvage value -180000 less networking calpital -50000 add recapture of nwc -50000 total free cash flow -1130000 430000 430000 430000 430000 480000 430000 discount factor @13% 1 0.884956 0.783147 0.69305 0.613319 0.54276 0.480319 discounted amount -1130000 380531 336753.1 298011.6 263727.1 260524.8 206537 npv 616084.4 particulars year 0 year 1 year 2 year 3 year 4 year 5 year 6 intial investment -1200000 EBIT 400000 400000 400000 400000 400000 400000 less taxes -120000 -120000 -120000 -120000 -120000 -120000 add new depreciation 200000 200000 200000 200000 200000 200000 less old depreciation -50000 -50000 -50000 -50000 add salvagevalue 300000 less tax on salvage value -180000 less networking calpital -50000 add recapture of nwc -50000 total free cash flow -1130000 430000 430000 430000 430000 480000 430000 discount factor @13% 1 0.884956 0.783147 0.69305 0.613319 0.54276 0.480319 discounted amount -1130000 380531 336753.1 298011.6 263727.1 260524.8 206537 npv 616084.4

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