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NPV of Acquisition of PPE

Meals on wings which supplies prepared meals for corporate aircraft needs to purchase new broilers. The new broilers would replace broilers purchased 10 years ago for $105,000, which are being depreciated on a straight line basis to a zero salvage value (15 year depreciable life). The old broilers can be sold today for 63,000. The new broilers will cost $202,000 installed, (not counting funds already spent) and will be depreciated straight line depreciation over their 5 year life. They will be sold at their book value at the end of the 5th year. The firm expects to increase its revenues by $27,000 per year if the new broilers are purchased but cash expenses will also increase by $3000 per year. Annual interest expense will be 2000 and net working capital will increase by 5000. The new broilers will occupy space currently leased to another firm for $530 per month and $5000 has already been spent preparing the building for new broilers. The firms tax rate is 40%. What is the NPV for the proposed acquisition if the cost of capital is 10%.

Solution Summary

This solution illustrates how to compute the net present value of replacement equipment.