posted by Herb on .
What is 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 straight-line basis. It has four more years of depreciation left ($50,000 in each years 1-4).
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 straight-line method over eight years (years 1-8).
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 1-8).
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:
D. $1, 874,717
Math? Not my area! But here are some tutorials on how to proceed: