Star Wars & Company is considering the replacement of its old, fully depreciated blasters. Two new...

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Finance

Star Wars & Company is considering the replacement of itsold, fully depreciated blasters. Two new models are available: Type168-3, which has a cost of $265,000, a 4-year expected life, andafter-tax cash flows (labor savings and depreciation) of $96,500per year; and Type 190-6, which has a cost of 465,000, a 8-yearlife, and after-tax cash flows of $101,800 per year. Blaster pricesare not expected to rise, because inflation will be offset bycheaper components (microprocessors) used in the modernblasters.
Assume that Star Wars' cost of capital is 12%. Calculate thetwo Blaster Types' NPVs. Round your answers to the nearest cent.(Hint: Adjust the NPV for the Blaster Type with the shorterlength)
Should the firm replace its old Blaster, and, if so, which newBlaster Type should it use?
By how much would the value of the company increase if itaccepted the better Blaster Type? Round your answer to the nearestcent. (hint:pick the higher valued Blaster from Part a).
What is the equivalent annual annuity for each Blaster Type?Round your answer to the nearest cent.

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4.3 Ratings (592 Votes)

Part a Cost of capital r 12 Type 1683 which has a cost of 265000 a 4year expected life and aftertax cash flows labor savings and depreciation of 96500 per year Hence NPV Initial investment PV of annual cashflows as See Answer

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