PC Shopping Network may upgrade its modem pool. It last upgraded 1 year ago, when it spent $114 million on equipment with an assumed life of 4 years and an assumed salvage value of $22 million for tax purposes. The firm uses straight-line depreciation. The old equipment can be sold today for $86 million. A new modem pool can be installed today for $156 million. This will have a 3-year life, and will be depreciated to zero using straight-line depreciation. The new equipment will enable the firm to increase sales by $15 million per year and decrease operating costs by $12 million per year. At the end of 3 years, the new equipment will be worthless. Assume the firm's tax rate is 35% and the discount rate for projects of this sort is 13%. (Enter your answers in millions. For example, an answer of $13,000,000 should be entered as 13. Use minus sign to enter cash outflows, if any.) a. What is the net cash flow at time 0 if the old equipment is replaced? (Do not round intermediate calculations. Round your answer to 2 decimal places.) The net cash flow at time 0 million b-1. What is the incremental cash flow in year 1? (Do not round intermediate calculations. Round your answer to 2 decimal places.) The incremental cash flow in year 1 million b-2. What is the incremental cash flow in year 2? (Do not round intermediate calculations. Round your answer to 2 decimal places.) The incremental cash flow in year 2 million
PC Shopping Network may upgrade its modem pool. It last upgraded 1 year ago, when it spent $114 million on equipment with an assumed life of 4 years and an assumed salvage value of $22 million for tax purposes. The firm uses straight-line depreciation. The old equipment can be sold today for $86 million. A new modem pool can be installed today for $156 million. This will have a 3-year life, and will be depreciated to zero using straight-line depreciation. The new equipment will enable the firm to increase sales by $15 million per year and decrease operating costs by $12 million per year. At the end of 3 years, the new equipment will be worthless. Assume the firm's tax rate is 35% and the discount rate for projects of this sort is 13%. (Enter your answers in millions. For example, an answer of $13,000,000 should be entered as 13. Use minus sign to enter cash outflows, if any.) a. What is the net cash flow at time 0 if the old equipment is replaced? (Do not round intermediate calculations. Round your answer to 2 decimal places.) The net cash flow at time 0 million b-1. What is the incremental cash flow in year 1? (Do not round intermediate calculations. Round your answer to 2 decimal places.) The incremental cash flow in year 1 million b-2. What is the incremental cash flow in year 2? (Do not round intermediate calculations. Round your answer to 2 decimal places.) The incremental cash flow in year 2 million
Fundamentals Of Financial Management, Concise Edition (mindtap Course List)
10th Edition
ISBN:9781337902571
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Eugene F. Brigham, Joel F. Houston
Chapter12: Cash Flow Estimation And Risk Analysis
Section: Chapter Questions
Problem 10P: Dauten is offered a replacement machine which has a cost of 8,000, an estimated useful life of 6...
Related questions
Question
Transcribed Image Text:PC Shopping Network may upgrade its modem pool. It last upgraded 1 year ago, when it spent $114 million on equipment with an
assumed life of 4 years and an assumed salvage value of $22 million for tax purposes. The firm uses straight-line depreciation. The old
equipment can be sold today for $86 million. A new modem pool can be installed today for $156 million. This will have a 3-year life,
and will be depreciated to zero using straight-line depreciation. The new equipment will enable the firm to increase sales by $15
million per year and decrease operating costs by $12 million per year. At the end of 3 years, the new equipment will be worthless.
Assume the firm's tax rate is 35% and the discount rate for projects of this sort is 13%. (Enter your answers in millions. For example,
an answer of $13,000,000 should be entered as 13. Use minus sign to enter cash outflows, if any.)
a. What is the net cash flow at time 0 if the old equipment is replaced? (Do not round intermediate calculations. Round your answer
to 2 decimal places.)
The net cash flow at time 0
million
b-1. What is the incremental cash flow in year 1? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
The incremental cash flow in year 1
million
b-2. What is the incremental cash flow in year 2? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
The incremental cash flow in year 2
million
b-3. What is the incremental cash flow in year 3? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
The incremental cash flow in year 3
million
Transcribed Image Text:c-1. What is the NPV of the replacement project? (Do not round intermediate calculations.Round your answer to 2 decimal places.)
NPV
million
c-2. What is the IRR of the replacement project? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
IR
%
d. Now ignore straight-line depreciation and assume that both new and old equipment are in an asset class with a CCA rate of 30%.
PC Shopping Network has other assets in this asset class. What is the NPV of the replacement project? For this part, assume that the
new equipment will have a salvage value of $31 million at the end of 3 years. (Do not round intermediate calculations. Round your
answer to 2 decimal places.)
NPV
million
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 4 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Fundamentals Of Financial Management, Concise Edi…
Finance
ISBN:
9781337902571
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning
Fundamentals Of Financial Management, Concise Edi…
Finance
ISBN:
9781337902571
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning
Cornerstones of Cost Management (Cornerstones Ser…
Accounting
ISBN:
9781305970663
Author:
Don R. Hansen, Maryanne M. Mowen
Publisher:
Cengage Learning