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# Net Cash Flow, Incremental Cash Flows, NPV and IRR

POLO may upgrade its "modem pool." It last upgraded two years ago, when it spent \$115 million dollars on equipment with an assumed life of 5 years. The firm uses straight-line depreciation (to 0.00). The old equipment can be sold today for \$30 million. A new modem pool can be installed today for \$150 million. New equipment will have a 3 year life, and will be depreciated to zero using straight-line depreciation. The new equipment will enable Polo to increase sales by \$25 million per year and decrease operating costs by \$10 million per year. At the end of 3 years, the new equipment will be worthless. Assume the firm's tax rate is 35% at that time and the discount rate for projects of this sort is 12%

a) What is the net cash flow at time period "0" if the old equipment is replaced?

b) What are the incremental cash flows in years 1, 2, and 3?

c) What are the NPV and the IRR of the replacement project?

#### Solution Preview

Capital Budgeting Project

POLO may upgrade its "modem pool." It last upgraded two years ago, when it spent \$115 million dollars on equipment with an assumed life of 5 years. The firm uses straight-line depreciation (to 0.00). The old equipment can be sold ...

#### Solution Summary

This solution is comprised of a detailed explanation on how to answer what the net cash flow at time period "0" if the old equipment is replaced is, what the incremental cash flows in years 1, 2, and 3 are, and what the NPV and the IRR of the replacement project is.

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