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

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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

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Solution Summary

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

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