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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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