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# Capital Budgeting Cash Flows Question

Question

Business XYZ is deciding whether or not to replace an existing asset. The proposed asset has a purchase cost of \$40,000 and an installation cost of \$6,000. The proposed asset will be depreciated over a six-year span using the straight-line depreciation approach. The new asset is expected to elevate sales by \$18,000 and non-depreciation expenses by \$2,500 annually over the life of the asset. Due to the increase in sales, the firm expects an increase in working capital of \$2,000, and the business expects to be able to sell the asset for \$5,000 at the end of its life. The existing asset was originally purchased two years ago for \$24,000, has a remaining life of six years, and is being depreciated using the simple straight-line method. The expected salvage value at the end of the asset's life is \$4,500; however, the current sale price of the existing asset is \$19,000, and its current book value is \$14,000. Business XYZ is in a 33% marginal tax bracket and has a required rate of return of 11%.

Calculate the value of this project. Should you replace the existing asset?

#### Solution Summary

This solution provides a detailed a computation of the given accounting problem.

\$2.19