In: Finance
Problem 9-34 Project Evaluation (LO2, 3)
PC Shopping Network may upgrade its modem pool. It last upgraded
2 years ago, when it spent $122 million on equipment with an
assumed life of 5 years and an assumed salvage value of $15 million
for tax purposes. The firm uses straight-line depreciation. The old
equipment can be sold today for $76 million. A new modem pool can
be installed today for $160 million. This will have a 3-year life,
and will be depreciated to zero using straight-line depreciation.
The new equipment will enable the firm to increase sales by $20
million per year and decrease operating costs by $12 million per
year. At the end of 3 years, the new equipment will be worthless.
Assume the firm's tax rate is 35% and the discount rate for
projects of this sort is 10%. (Enter your answers in
millions. For example, an answer of $13,000,000 should be entered
as 13. Use minus sign to enter cash outflows, if
any.)
a. What is the net cash flow at time 0 if the old
equipment is replaced? (Do not round intermediate
calculations. Round your answer to 2 decimal places.)
b-1. What is the incremental cash flow in year 1? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
b-2. What is the incremental cash flow in year 2? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
b-3. What is the incremental cash flow in year 3? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
c-1. What is the NPV of the replacement project? (Do not round intermediate calculations.Round your answer to 2 decimal places.)
c-2. What is the IRR of the replacement project? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
d. Now ignore straight-line depreciation and assume that both new and old equipment are in an asset class with a CCA rate of 30%. PC Shopping Network has other assets in this asset class. What is the NPV of the replacement project? For this part, assume that the new equipment will have a salvage value of $29 million at the end of 3 years. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Note: I would appreciate if all steps were shown to help me understand where the answer is coming from.