PC Shopping Network may upgrade its modem pool. It last upgraded 2 years ago, wh
ID: 2742945 • Letter: P
Question
PC Shopping Network may upgrade its modem pool. It last upgraded 2 years ago, when it spent $135 million on equipment with an assumed life of 5 years and an assumed salvage value of $30 million for tax purposes. The firm uses straight-line depreciation. The old equipment can be sold today for $100 million. A new modem pool can be installed today for $180 million. This will have a 3-year life and will be depreciated to zero using straight-line depreciation. The new equipment will enable the firm to increase sales by $23 million per year and decrease operating costs by $11 million per year. At the end of 3 years, the new equipment will be worthless. Assume the firm’s tax rate is 35% and the discount rate for projects of this sort is 11%. a. What is the net cash flow at time 0 if the old equipment is replaced? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) Net cash flow $ million b. What are the incremental cash flows in years 1, 2, and 3? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) Incremental cash flow $ million per year c. What are the NPV and IRR of the replacement project? (Do not round intermediate calculations. Enter the NPV in millions rounded to 2 decimal places. Enter the IRR as a percent rounded to 2 decimal places.) NPV $ million IRR
Explanation / Answer
a.)
All amount in million's
b.)
c.)
As Project is negative practically project has negative IRR or no returns. so therefore, project has no IRR.
Particulars 0 Machine sold (+) $ 100.00 Machine Purchased (-) $ (180.00) Incremental sales (+) Operating cost (-) Depriciation (-) EBIT $ (80.00) Less:taxes or tax advantage $ (28.00) EBT $ (108.00) Add: depriciation non-cash expenses Net operating profit after taxes $ (108.00)Related Questions
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