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? Note: 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 incremental cash flows in years: (i) 1; (ii) 2; (iii) 3? Note: Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places. c. What is the NPV of the replacement project? Note: Do not round intermediate calculations. Enter the NPV in millions rounded to 2 decimal places. d. What is the IRR of the replacement project? Note: Do not round intermediate calculations. Enter the IRR as a percent rounded to 2 decimal places. a. Net cash flow $ 120.00 million b. Incremental cash flow $ (5.00) million per year c. NPV $ (12.65) million d. IRR 13.55 %
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? Note: 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 incremental cash flows in years: (i) 1; (ii) 2; (iii) 3? Note: Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places. c. What is the NPV of the replacement project? Note: Do not round intermediate calculations. Enter the NPV in millions rounded to 2 decimal places. d. What is the IRR of the replacement project? Note: Do not round intermediate calculations. Enter the IRR as a percent rounded to 2 decimal places. a. Net cash flow $ 120.00 million b. Incremental cash flow $ (5.00) million per year c. NPV $ (12.65) million d. IRR 13.55 %
Chapter9: Capital Budgeting And Cash Flow Analysis
Section: Chapter Questions
Problem 17P
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Question
Transcribed Image Text: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?
Note: 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 incremental cash flows in years: (i) 1; (ii) 2; (iii) 3?
Note: Do not round intermediate calculations. Enter your answer in millions
rounded to 2 decimal places.
c. What is the NPV of the replacement project?
Note: Do not round intermediate calculations. Enter the NPV in millions rounded
to 2 decimal places.
d. What is the IRR of the replacement project?
Note: Do not round intermediate calculations. Enter the IRR as a percent
rounded to 2 decimal places.
a. Net cash flow
$
120.00 million
b. Incremental cash flow
$
(5.00) million per year
c. NPV
$
(12.65) million
d. IRR
13.55 %
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