4. Analysis of a replacement project At times firms will need todecide if they want to continue to use their current equipment orreplace the equipment with newer equipment. The company will needto do replacement analysis to determine which option is the bestfinancial decision for the company. Price Co. is consideringreplacing an existing piece of equipment. The project involves thefollowing: • The new equipment will have a cost of $600,000, and itwill be depreciated on a straight-line basis over a period of sixyears (years 1–6). • The old machine is also being depreciated on astraight-line basis. It has a book value of $200,000 (at year 0)and four more years of depreciation left ($50,000 per year). • Thenew equipment will have a salvage value of $0 at the end of theproject's life (year 6). The old machine has a current salvagevalue (at year 0) of $300,000. • Replacing the old machine willrequire an investment in net working capital (NOWC) of $60,000 thatwill be recovered at the end of the project's life (year 6). • Thenew machine is more efficient, so the firm’s incremental earningsbefore interest and taxes (EBIT) will increase by a total of$300,000 in each of the next six years (years 1–6). Hint: Thisvalue represents the difference between the revenues and operatingcosts (including depreciation expense) generated using the newequipment and that earned using the old equipment. • The project'scost of capital is 13%. • The company's annual tax rate is 30%.Complete the following table and compute the incremental cash flowsassociated with the replacement of the old equipment with the newequipment. Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Initialinvestment EBIT – Taxes + ? Depreciation × T + Salvage value – Taxon salvage – NOWC + Recapture of NOWC Total free cash flow The netpresent value (NPV) of this replacement project is: $636,656$664,337 $470,572 $553,614