Explain what is the net cash flow

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Reference no: EM1313328

PC shopping Network may upgrade its modem pool. It last upgraded 2 years ago, when it spent $115 million on equipment with an assumed life of 5 years and an assumed salvage value of $15 million for tax purposes. The firm uses straight-line depreciation. The old equipment can be sold today for $80 million. A new modem pool can be installed today for $150 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 $25 million per year and decrease operating costs by $10 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 project of this sort is 10%.

1. What is the net cash flow at time 0 if the old equipment is replaced?

2. What are the incremental cash flows in years 1, 2 and 3?

3. What are the NPV and IRR of the replacement project?

Reference no: EM1313328

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