Purple Turtle Group is a company that produces iGadgets, among several other pro

Question

Purple Turtle Group is a company that produces iGadgets, among several other products. Suppose that Purple Turtle Group considers replacing its old machine used to make iGadgets with a more efficient one, which would cost $1,800 and require $250 annually in operating costs except depreciation. After-tax salvage value of the old machine is $600, while its annual operating costs except depreciation are $1,100. Assume that, regardless of the age of the equipment, Purple Turtle Group's sales revenues are fixed at $3,500 and depreciation on the old machine is $600 Assume also that the tax rate is 40% and the project's risk-adjusted cost of capital, r, is the same as weighted average cost of capital (WACC) and equals 10% , and they are constant over four Based on the data, net cash flows (NCFs) before replacement are years Although Purple Turtle Group's NCFs before replacement are the same over the 4-year period, its NCFs after replacement vary annually. The following table shows depreciation rates over four years Year 1 Year 2 Year 3 Year 4 Depreciation rates 33.33% 44.45% 14.81% 7.41% Complete the following table and calculate incremental cash flows in each year. Hint: Round your answers to the nearest dollar and remember to enter a minus sign if the calculated value is negative Year 0 Year 1 Year 2 Year 3 Year 4 New machine cost After-tax salvage value, old machine Sales revenues Operating costs except depreciation Operating income After-tax operating income Net cash flows after replacement (adding back depreciation) Incremental Cash Flows $1,800 $600 $3,500 $250 $3,500 $250 $3,500 $250 $3,500 $250 Next evaluate the incremental flows by calculating the net present value (NPV), the internal rate of return (IRR), and the modified IRR (MIRR). Assume again that the cost of financing the new project is the same as the WACC and equals 10%. Hint: Use a spreadsheet program's functions or use a financial calculator for this task NPV IRR MIRR Evaluation Based on the evaluation, replacing the old equipment appears to bea decision because

Explanation / Answer

CALCULATION OF NPV

CALCULATION OF IRR

CALCULATION OF MIRR =

CALCULATION OD NET CASH FLOW DURING NEW SYSTEM sales revenue 3500 3500 3500 3500 less operating cost except depriciation 250 250 250 250 operating income 3250 3250 3250 3250 less tax@40% 1300 1300 1300 1300 after tax operating income 1950 1950 1950 1950 add tax saving on depriciation(tax*depriciation) 239.976 320.04 106.632 53.352 net cash flow    (A) 2189.976 2270.04 2056.632 2003.352 DEPRICIATION CALCULATION rate 33.33% 44.45% 14.81% 7.41% cost 1800 1800 1800 1800 DEPRICIATION amount 599.94 800.1 266.58 133.38

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