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

Increamental Cash Flow in year 6:

Note: As the 3-year MACRS depreciation method is used, there will be no depreciation in year 6.

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