Fundamentals Of Corporate Finance, 9th Edition
9th Edition
ISBN: 9781260052220
Author: Richard Brealey; Stewart Myers; Alan Marcus
Publisher: McGraw-Hill Education
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Chapter 9, Problem 13QP
a)
Summary Introduction
To determine: Net cash flow at time 0 when old equipment is exchanged.
b)
Summary Introduction
To determine: Incremental cash flows for 1, 2 and 3.
c)
Summary Introduction
To determine:
d)
Summary Introduction
To determine:
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PC Shopping Network may upgrade its modem pool. It last upgraded 2 years ago, when it spent $120 million on equipment with an assumed life of 5 years and an assumed salvage value of $15 million for tax purposes. The firm uses straight-line depreciation. The old equipment can be sold today for $80 million. A new modem pool can be installed today for $150 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 $22 million per year and decrease operating costs by $11 million per year. At the end of 3 years, the new equipment will be worthless. Assume the firm’s tax rate is 30% and the discount rate for projects of this sort is 9%.
a. What is the net cash flow at time 0 if the old equipment is replaced?
b. What are the incremental cash flows in years (i) 1; (ii) 2; (iii) 3?
c. What is the NPV of the replacement project?
d. What is the IRR of the replacement project?
PC Shopping Network may upgrade its modem pool. It last upgraded 2 years ago, when it spent $105 million on equipment with an assumed life of 5 years and an assumed salvage value of $10 million for tax purposes. The firm uses straight-line depreciation. The old equipment can be sold today for $120 million. A new modem pool can be installed today for $240 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 $37 million per year and decrease operating costs by $18 million per year. At the end of 3 years, the new equipment will be worthless. Assume the firm’s tax rate is 30% and the discount rate for projects of this sort is 9%.
Required:
c. What is the NPV of the replacement project? (Do not round intermediate calculations. Enter the NPV in millions rounded to 2 decimal places.)
PC Shopping Network may upgrade its modem pool. It last upgraded 2 years ago, when it spent $105 million on equipment with an assumed life of 5 years and an assumed salvage value of $10 million for tax purposes. The firm uses straight-line depreciation. The old equipment can be sold today for $120 million. A new modem pool can be installed today for $240 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 $37 million per year and decrease operating costs by $18 million per year. At the end of 3 years, the new equipment will be worthless. Assume the firm's tax rate is 30% and the discount rate for projects of this sort is 9%.
Required:
a. What is the net cash flow at time 0 if the old equipment is replaced? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)
b. What are the…
Chapter 9 Solutions
Fundamentals Of Corporate Finance, 9th Edition
Ch. 9 - Prob. 1QPCh. 9 - Prob. 2QPCh. 9 - Prob. 3QPCh. 9 - Prob. 4QPCh. 9 - Prob. 5QPCh. 9 - Prob. 6QPCh. 9 - Prob. 7QPCh. 9 - Prob. 8QPCh. 9 - Prob. 10QPCh. 9 - Prob. 12QP
Ch. 9 - Prob. 13QPCh. 9 - Prob. 14QPCh. 9 - Prob. 15QPCh. 9 - Prob. 17QPCh. 9 - Prob. 20QPCh. 9 - Prob. 21QPCh. 9 - Prob. 22QPCh. 9 - Prob. 23QPCh. 9 - Prob. 24QPCh. 9 - Prob. 25QPCh. 9 - Prob. 26QPCh. 9 - Prob. 27QPCh. 9 - Prob. 28QPCh. 9 - Prob. 29QPCh. 9 - Prob. 30QPCh. 9 - Prob. 32QPCh. 9 - Prob. 34QP
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