4. Analysis of a replacement project At limes firms will need to decide if they

Question

4. Analysis of a replacement project At limes 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. LoRusso Co. is considering replacing an existing piece of equipment. The project involves the following: 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:

Explanation / Answer

year 0 1 2 3 4 5 6 Intial investment Rs. -90,00,000.00 EBIT 300000 300000 300000 300000 300000 300000 (taxes) 120000 120000 120000 120000 120000 120000 NEW depreciation 39000 39000 39000 39000 39000 39000 (old depreciation) 200000 50000 50000 50000 50000 Salvage value 300000 (tax on salvage) (NWC) 45000 recapture of NWC Total free cash flow Rs. -89,45,000.00 169000 169000 169000 169000 219000 219000 Rate@13% 1 0.884955752 0.783146683 0.693050162 0.613318728 0.542759936 0.480318527 PV Rs. -89,45,000.00 Rs. 1,49,557.52 Rs. 1,32,351.79 Rs. 1,17,125.48 Rs. 1,03,650.86 Rs. 1,18,864.43 Rs. 1,05,189.76 NPV Rs. -82,18,260.16

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