Posted by Herb on .
What's the net present value (NPV) of this replacement project?
The old equipment has a book value of $200,000 (year 0) and a current salvage value of $300,000 (year 0). It is being depreciated on a straightline basis. It has four more years of depreciation left ($50,000 in each years 14).
The new equipment will have cost $800,000 (year 0) and $0 salvage value at the end of its life. It will be depreciated using the straightline method over eight years (years 18).
Replacing the old machine with the new machine will require an investment in net working capital of $50,000 that will be recovered at the end of the new machine’s life (year 8).
The new machine is more efficient, and the incremental increase in its operating income (EBIT) is equivalent to $600,000 for the next eight years (years 18).
The project’s cost of capital is 13%. The annual tax rate is 30%.
Which is the net present value (NPV) of this replacement project:
A. $1,785,445
B. $1,517,628
C. $2,142,534
D. $1, 874,717
E. $1,339,084

Finance 
SraJMcGin,
Please refer to your later post, which I saw first.
Sra