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 $140 million on equipment with anassumed life of 5 years and an assumed salvage value of $16 millionfor tax purposes. 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 be worthless.Assume the firm’s tax rate is 35% and the discount rate forprojects of this sort is 10%.
a. What is the net cash flow at time 0 if the old equipment isreplaced? (Negative amounts should be indicated by a minus sign. Donot round intermediate calculations. Enter your answer in millionsrounded to 2 decimal places.)
b. What are the incremental cash flows in years 1, 2, and 3? (Donot round intermediate calculations. Enter your answer in millionsrounded to 2 decimal places.)
c. What are the NPV and IRR of the replacement project? (Do notround intermediate calculations. Enter the NPV in millions roundedto 2 decimal places. Enter the IRR as a percent rounded to 2decimal places.)

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Part aAll financials below are in mnThe net cash flow at time 0 if the old equipment is replaced Sale value of old equipment taxes on sale value Purchase costof new equipmentAnnual depreciation on old equipment 140 16 5 248Book value of old equipment today 140 248 x 2 904Sale value 80Gain on sale See Answer

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PC Shopping Network may upgrade its modem pool. It last upgraded2 years ago, when it spent $140 million on equipment with anassumed life of 5 years and an assumed salvage value of $16 millionfor tax purposes. 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 be worthless.Assume the firm’s tax rate is 35% and the discount rate forprojects of this sort is 10%.a. What is the net cash flow at time 0 if the old equipment isreplaced? (Negative amounts should be indicated by a minus sign. Donot round intermediate calculations. Enter your answer in millionsrounded to 2 decimal places.)b. What are the incremental cash flows in years 1, 2, and 3? (Donot round intermediate calculations. Enter your answer in millionsrounded to 2 decimal places.)c. What are the NPV and IRR of the replacement project? (Do notround intermediate calculations. Enter the NPV in millions roundedto 2 decimal places. Enter the IRR as a percent rounded to 2decimal places.)