In 21 21 replacement problem pro replacement forma

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Unformatted text preview: 0 New New 49,500 67,500 22,500 10,500 0 Old Old 9,000 9,000 9,000 9,000 9,000 40,500 58,500 13,500 1,500 (9,000) EBIT 9,500 (8,500) 36,500 48,500 59,000 Taxes 3,800 (3,400) 14,600 19,400 23,600 NI 5,700 (5,100) 21,900 29,100 35,400 Cost Cost Savings Savings Depr. Increm. 22 22 Replacement Problem – Incremental Replacement Net Capital Spending Net Year 0 Cost of new machine = 150,000 (outflow) After-tax salvage on old machine = 65,000 - .4(65,000 After-tax – 55,000) = 61,000 (inflow) 55,000) Incremental net capital spending = 150,000 – 61,000 Incremental = 89,000 (outflow) 89,000 Year 5 After-tax salvage on old machine = 10,000 - .4(10,000 After-tax – 10,000) = 10,000 (outflow because we no longer receive this) receive 23 23 Replacement Problem – Cash Flow Replacement From Assets From Year 0 2 3 4 5 46,200 OCF 1 53,400 35,400 30,600 26,400 NCS -89,000 -10,000 ∆ In NWC NWC 0 0 CFFA -89,000 46,200 53,400 35,400 30,600 16,400 24 24 Replacement Problem – Replacement Analyzing the Cash Flows Analyzing Now that we have the cash flows, we can Now compute the NPV and IRR compute Enter the cash flows Compute NPV = 54,812.10 Compute IRR = 36.28% Should the company replace the Should equipment? equipment? 25 25 Other Methods for Computing OCF Bottom-Up Approach Top-Down Approach Works only when there is no interest expense OCF = NI + depreciation OCF = Sales – Costs – Taxes Don’t subtract non-cash deductions Tax Shield Approach OCF = (Sales – Costs)(1 – T) + Depreciation*T 26 26 10 10 End of Chapter 27...
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