PC Shopping Network may upgrade its modem pool. It last upgraded 2 years ago, when it...

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PC Shopping Network may upgrade its modem pool. It last upgraded2 years ago, when it spent $95 million on equipment with an assumedlife of 5 years and an assumed salvage value of $18 million for taxpurposes. The firm uses straight-line depreciation. The oldequipment can be sold today for $80 million. A new modem pool canbe installed today for $150 million. This will have a 3-year lifeand will be depreciated to zero using straight-line depreciation.The new equipment will enable the firm to increase sales by $25million per year and decrease operating costs by $10 million peryear. At the end of 0 years, the new equipment will beworthless. Assume the firm’s tax rate is 35% and thediscount rate for projects of this sort is 10%.
a. What is the net cash flow at time 0 if theold equipment is replaced? (Negative amounts should beindicated by a minus sign. Do not round intermediate calculations.Enter your answer in millions rounded to 2 decimalplaces.)
(95-18)/5=15.4 Annual depreciation
95-(2x15.4)=64.2 Book value at time of sale
b. What are the incremental cash flows in years1, 2, and 3? (Do not round intermediate calculations. Enteryour answer in millions rounded to 2 decimal places.)
Incremental cash flow = 34.86 million per year

c. What are the NPV and IRR of the replacementproject? (Do not round intermediate calculations. Enter theNPV in millions rounded to 2 decimal places. Enter the IRR as apercent rounded to 2 decimal places.)

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Answers a The Net Cash Flow at the year 0 when the old equipment is replaced shall consist of Cash Inflow from sale of old equipment and Cash Outflow for purchase of new equipment that is 80 million cash inflow and 150 million cash outflow thus net cash flow 150 million 80 million 70 million net cash outflow at year 0 Note here we have ignored taxation on gain on sale of old equipment if we need to calculate 35 tax on gain on sale of old equipment than net cash See Answer

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PC Shopping Network may upgrade its modem pool. It last upgraded2 years ago, when it spent $95 million on equipment with an assumedlife of 5 years and an assumed salvage value of $18 million for taxpurposes. The firm uses straight-line depreciation. The oldequipment can be sold today for $80 million. A new modem pool canbe installed today for $150 million. This will have a 3-year lifeand will be depreciated to zero using straight-line depreciation.The new equipment will enable the firm to increase sales by $25million per year and decrease operating costs by $10 million peryear. At the end of 0 years, the new equipment will beworthless. Assume the firm’s tax rate is 35% and thediscount rate for projects of this sort is 10%.a. What is the net cash flow at time 0 if theold equipment is replaced? (Negative amounts should beindicated by a minus sign. Do not round intermediate calculations.Enter your answer in millions rounded to 2 decimalplaces.)(95-18)/5=15.4 Annual depreciation95-(2x15.4)=64.2 Book value at time of saleb. What are the incremental cash flows in years1, 2, and 3? (Do not round intermediate calculations. Enteryour answer in millions rounded to 2 decimal places.)Incremental cash flow = 34.86 million per year c. What are the NPV and IRR of the replacementproject? (Do not round intermediate calculations. Enter theNPV in millions rounded to 2 decimal places. Enter the IRR as apercent rounded to 2 decimal places.)