NOTE: You already replied on this question with the answers as indicated below. Unfortunately, all answers are being marked as incorrect. I can’t figure out what’s missing in the calculation process. Please recalculate. Thanks.
PC Shopping Network may upgrade its modem pool. It last upgraded 2 years ago, when it spent $100 million on equipment with an assumed life of 5 years and an assumed salvage value of $12 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 0 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 10%.
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.)
Net cash flow: $75.32 million
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.)
Incremental cash flow: $40.25 million
c.What are the NPV and IRR of the replacement project? (Do not round intermediate calculations. Enter the NPV in millions rounded to 2 decimal places. Enter the IRR as a percent rounded to 2 decimal places.)
NPV: $24.78 million
IRR: 28.00%. Get Finance Help Today
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