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