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PC Shopping Network may upgrade its modem pool. It last upgraded 2 years ago, when it spent $150 million on equipment with an assumed life of 5 years and an assumed salvage value of $20 million for tax purposes. The firm uses straight-line depreciation. The old equipment can be sold today for $110 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 $34 million per year and decrease operating costs by $17 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 8%.
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.)
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.)
c. What are the NPV and IRR of the replacement project?
Lakeside Winery is considering expanding its wine making operations. The expansion will require new equipment costing $649,000 that would be depreciated on a straight-line basis to a zero balance over the four-year life of the project. What is the ne..
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Cornell Systems analyzed the project whose cash flows are shown below. It is 100% debt financed. The tax rate is 20%. The yield on company`s bond is 6,25% Year 0 1 2 3 Cash flows -$950 $500 $400 $300 Calculate the projects NPV, Profitability ratio an..
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