| Old Equipment: |
| Depreciation expense, Years 1 to 5 | $650 |
| Depreciation expense, Year 6 | $325 |
| Current book value | $3,575 |
| Current market value | $4,150 |
| Market value, Year 6 | $800 |
| New Equipment: |
| Estimated useful life (in years) | 6 |
| Purchase price | $12,000 |
| Salvage value, Year 6 | $1,200 |
| Annual sales increase | $2,000 |
| Annual reduction in operating expenses | $1,600 |
| Initial increase in inventories | $2,900 |
| Initial increase in accounts payable | $700 |
| | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 |
| MACRS depreciation rates (5-year class): | 20.00% | 32.00% | 19.20% | 11.52% | 11.52% | 5.76% |
| Tax rate | 40.00% |
| WACC | 13.00% |
| Step 1: Calculation of investment at t = 0 | | Formulas |
| Purchase price of new equipment | ($12,000) |
| Sale of old equipment | $4,150 |
| Tax on sale of old equipment | | ERROR:#N/A |
| Change in net operating working capital | | ERROR:#N/A |
| Total investment outlay | | ERROR:#N/A |
| Step 2: Calculation of annual after-tax cash inflows |
| Annual sales increase | $2,000 |
| Annual reduction in operating expenses | $1,600 |
| Annual increase in pre-tax revenues | | ERROR:#N/A |
| After-tax annual revenue increase | | ERROR:#N/A |
| Step 3: Calculation of annual depreciation tax savings |
| | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 |
| New equipment |
| Old equipment | $650 | $650 | $650 | $650 | $650 | $325 |
| Change in annual depreciation | ($650) | ($650) | ($650) | ($650) | ($650) | ($325) |
| Annual dpreciation tax savings |
| Formulas |
| | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 |
| New equipment | ERROR:#N/A | ERROR:#N/A | ERROR:#N/A | ERROR:#N/A | ERROR:#N/A | ERROR:#N/A |
| Old equipment | $650 | $650 | $650 | $650 | $650 | $325 |
| Change in annual depreciation | ($650) | ($650) | ($650) | ($650) | ($650) | ($325) |
| Annual depreciation tax savings | ERROR:#N/A | ERROR:#N/A | ERROR:#N/A | ERROR:#N/A | ERROR:#N/A | ERROR:#N/A |
| Step 4: Calculation of net present value of replacement |
| | Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 | Formulas |
| Initial investment outlay | $0 |
| Annual after-tax revenue increase | | $0 | $0 | $0 | $0 | $0 | $0 |
| Annual depreciation tax savings | | $0 | $0 | $0 | $0 | $0 | $0 |
| Working capital recovery | | | | | | | | ERROR:#N/A |
| Salvage value on new equipment | | | | | | | $1,200 |
| Tax on salvage value of new equipment | | | | | | | | ERROR:#N/A |
| Opportunity cost of old equpment | | | | | | | | ERROR:#N/A |
| Project cash flows | $0 | $0 | $0 | $0 | $0 | $0 | | #N/A |
| | | Formulas |
| Net present value | | ERROR:#N/A |
| Should firm replace the old equipment? | | ERROR:#N/A |
echidester
excel2.xlsx
