Question 6: ABC Co. is considering replacing an old computer with a new one. The old...

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Question 6: ABC Co. is considering replacing an old computerwith a new one. The old one was purchased 1 year ago for $600,000.It is depreciated strait-line to zero over 6 years. It is expectedto be worth $10,000 at the end of its 6-year life. If ABC sells ittoday, ABC should receive $300,000 for the computer. The newcomputer costs $750,000. It has a life of 5 years and will bedepreciated strait-line to zero over its 5-year life. It isexpected to be worthless at the end of its 5-year life. The newgenerator is expected to reduce the operating costs by $200,000 peryear. There is no change in net working capital. The discount rateof this replacement project is 15%, and the tax rate is40%.
Year
1
2
3
4
5
Cost Savings
Depreciation
New
Old
Increm. Dep
EBIT
Taxes
NI
Year 0
Cost of new computer =
After-tax cash flows of old computer sale =
Incremental net capital spending =
Years 1-4
Operating cash flow =
Year 5
Operating cash flow =
After-tax cash flows of old computer sale =
Year
0
1
2
3
4
5
OCF
NCS
DNWC
CFFA
NPV =

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Formula Year n 1 2 3 4 5 Cost savings CS 200000 200000 200000 200000 200000 Depreciation New computer D1 150000 150000 150000 150000 150000 Old computer D2 100000 100000 100000 100000 100000 D1D2 Incremental depreciation D 50000 50000 50000 50000 50000 CS D EBIT 150000 150000 150000 150000 See Answer

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Question 6: ABC Co. is considering replacing an old computerwith a new one. The old one was purchased 1 year ago for $600,000.It is depreciated strait-line to zero over 6 years. It is expectedto be worth $10,000 at the end of its 6-year life. If ABC sells ittoday, ABC should receive $300,000 for the computer. The newcomputer costs $750,000. It has a life of 5 years and will bedepreciated strait-line to zero over its 5-year life. It isexpected to be worthless at the end of its 5-year life. The newgenerator is expected to reduce the operating costs by $200,000 peryear. There is no change in net working capital. The discount rateof this replacement project is 15%, and the tax rate is40%. Year12345Cost SavingsDepreciationNewOldIncrem. DepEBITTaxesNIYear 0Cost of new computer =After-tax cash flows of old computer sale = Incremental net capital spending =Years 1-4Operating cash flow =Year 5Operating cash flow =After-tax cash flows of old computer sale =Year012345OCFNCSDNWCCFFANPV =

Year	1	2	3	4	5
Cost Savings
Depreciation
New
Old
Increm. Dep
EBIT
Taxes
NI