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Using capital budgeting techniques to evaluate the replacement project (NPV, IRR MIRR, PBP, or PI)

BPA Corporation is considering the purchase of a new electronic painting equipment to replace the existing equipment that has a book value of 3,000 and can be sold for 1,500. The old equipment is being depreciated on a straight line basis and its estimated salvage value 3 years from now is zero. The new equipment will reduce costs (before taxes) by 7,000/year. The new equipment has a 3-year life, it costs 14,000 and it can be sold for an expected 2,000 at the end of the third year. The new equipment would be depreciated over its 3-year life using the MACRS method. BPA's cost of capital is 16 percent and its tax rate is 40 percent

Additional Requirements

Level of Detail: Show all work
Other Requirements:
1) Calculate Net Investment at t0 :
a.Gain from disposing old machine:
Dep. of old machine:
Book Value of the old machine
Gain from selling the old machine
Tax effect

b) Net Investment

2) Calculation of Incremental Operating Cash Flows for Each Year:

b) Calculation of Incremental Operating Cash Flows: Let us consider the effect of this replacement on income statement and operation cash flow in the first year of replacement.
IOCFt = (?S t - ?OC t)(1 - T) + ?Dep t (T)

3) Incorporating Opportunity costs, if any.

4) Project Evaluation.

Use capital budgeting techniques to evaluate the replacement project (NPV, IRR, MIRR, PBP, or PI

Solution Summary

The expert uses capital budgeting techniques toe valuate the replacement. projects.