Price Co. is considering replacng an exsting piece of equipment. The projecdt in

Question

Price Co. is considering replacng an exsting piece of equipment. The projecdt involves the fellowing . The new equipment will have a cost of $600,000, and The old machine is also being deprecianed on a straight tine basis It has a bock value of will be depreciabed on a straight-Iine basis over a parlod of sx years (years 1-6) The old machine (s50,000 per year). " also being depreciated on a straight-ane bath. It has bock value or $20e,e00 (at rear o) and tur more years of depreciation left he new eqiament ell have a salvage vaue of s0o at the end of the projets ifle (year 6) The oid machine has a curent salvage value (at year o) of $300,000 Replacing the oid machine nill require an investment in net working 6) The new machine is more efficient, so the ire's incremectal carnings befcre interest and taves (EBETil increase by a tots of $300,000 in eadh of the nest six years tyeers 1-6). Hint: this value represents the ditteresce betwees the revenues and operating costs (induding depreciation experse) t capital (NWC) of $20,000 that will be recovered at the end of the project's ife (year generated using the se equipment and thot earned using the old equent . The pr t's cost eraa tal tity. · The company's annual tax nate 40%. Complete the following table and cometne te incremertat cash now, isacciated with reglacement of the oid equipnot-th the new equipment. Year t Tear3 Year 5 Year 6 Initial nvestmen $300,000 New depreciarton id depreciation Tax on saivege + Recapture of Nwc + Satvage valae Total free cash flow $280,000 ow

Explanation / Answer

1)

Answer

NPV = $ 620,197

Working Year0 Year1 Year2 Year3 Year4 Year5 Year6 Initial Investment -600000 0 0 0 0 0 0 EBIT 300000 300000 300000 300000 300000 300000 -Taxes (300000*40%) -120000 -120000 -120000 -120000 -120000 -120000 + New Depreciation 100000 100000 100000 100000 100000 100000 -Old Depreciation -50000 -50000 -50000 -50000 0 0 +Salvage Value 300000 -Tax on Salvage Value (40%*(300000-200000)) -40000 -NWC -20000 + Recapture of NWC 0 0 0 0 0 0 20000 Total FreeCash Flow -360000 230000 230000 230000 230000 280000 300000 Discount factor (@13%) 1.00000 0.88496 0.78315 0.69305 0.61332 0.54276 0.48032 Present Value -360000 203539.82 180123.74 159401.5373 141063.307 151972.8 144095.6 Net Present Value                    620,196.75

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