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King Fisher Aviation is considering an investment in a new technology for a drone project with...

King Fisher Aviation is considering an investment in a new technology for a drone project with a price of $16 million. Their current technology has a book value of $5 million and a market value of $5 million. The new technology is expected to have a five (5) year life, and the old technology has three (3) years left in which it can be expected to be used. If the firm replaces the old technology with the new technology it expects to save $5.7 million in operating costs each year over the next four years. If the firm purchases the new technology, it will also need an investment of $300,000 in net working capital. The required return on the investment is 12 percent, and the tax rate is 39 percent.

What are the NPV and IRR of the decision to replace the old technology?

Fill in the values in the spreadsheet.

Cost of new machine $        16,000,000
Old machine book value $          5,000,000
Old machine market value $          5,000,000
Years of operation                              5
Saved operating costs $          5,700,000
Net working capital $             300,000
Required return 12%
Tax rate 39%
*Depreciation straight-line
Buy new machine Keep old machine Incremental
analysis
Initial cash outlay:
Purchase new machine
Net working capital
Sell (buy) old machine
Taxes on old machine
Total
Incremental cash flows
Operating expense
Depreciation
EBT
Taxes
Net income
OCF
Year Cash flow Cash flow Cash flow
0
1
2
3
4
NPV
IRR

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