Suppose we are thinking about replacing an old computer with a new one. The old one cost us $1,330,000; thenew one will cost $1,590,000. The new machine will be depreciated straight-line to zero over its five-year life.It will probably be worth about $330,000 after five years. The old computer is being depreciated at a rate of $266,000 per year. It will be completely written off in three years. If we don't replace it now, we will have toreplace it in two years. We can sell it now for $450,000; in two years, it will probably be worth $123,000. Thenew machine will save us $293,000 per year in operating costs. The tax rate is 23 percent and the discount rateis 12 percent. Calculate the EAC for the old computer and the new computer. (A negative answer should beindicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) What is the NPV of the decision to replace the computer now? (A negative answer should beindicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Calculations:A. Equivalent Annual Cost (EAC) for Old Computer (Year 0):1. Tax shield from…

Answered: Suppose we are thinking about replacing…

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter11: Cash Flow Estimation And Risk Analysis

Section: Chapter Questions

Problem 4P: Although the Chen Company’s milling machine is old, it is still in relatively good working order and...

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Tyrell Corp. is considering replacing a machine. The old one is currently being depreciated at $70,000 per year (straight-line), and is scheduled to end in five years with no remaining book value. If you don't replace it, you will be lucky to get it removed for the amount you could salvage it for, so you don't expect any profit in five years. If you replace the old machine now, you believe you can salvage it for $375,000 and buy a new machine for $850,000, plus $25,000 shipping fee and another $25,000 for installation. The new machine will not change the revenue or NOWC, but it will reduce the operating costs of the company by $145,000 per year. The new machine will be depreciated using the three-year MACRS schedule (the table is provided on the Moodle for your convenience). The useful life of this machine is five years, and it is expected that the machine can be sold at $20,000 at the end of the five years. Assume a tax rate of 25% and the cost of capital for the company is 8%.…
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