PC Shopping Network may upgrade its modem pool. It last upgraded 1 year ago, when it spent $114 million on equipment with an assumed life of 4 years and an assumed salvage value of $22 million for tax purposes. The firm uses straight-line depreciation. The old equipment can be sold today for $86 million. A new modem pool can be installed today for $156 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 $15 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 13%. (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.) The net cash flow at time 0 million b-1. What is the incremental cash flow in year 1? (Do not round intermediate calculations. Round your answer to 2 decimal places.) The incremental cash flow in year 1 million b-2. What is the incremental cash flow in year 2? (Do not round intermediate calculations. Round your answer to 2 decimal places.) The incremental cash flow in year 2 million
PC Shopping Network may upgrade its modem pool. It last upgraded 1 year ago, when it spent $114 million on equipment with an assumed life of 4 years and an assumed salvage value of $22 million for tax purposes. The firm uses straight-line depreciation. The old equipment can be sold today for $86 million. A new modem pool can be installed today for $156 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 $15 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 13%. (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.) The net cash flow at time 0 million b-1. What is the incremental cash flow in year 1? (Do not round intermediate calculations. Round your answer to 2 decimal places.) The incremental cash flow in year 1 million b-2. What is the incremental cash flow in year 2? (Do not round intermediate calculations. Round your answer to 2 decimal places.) The incremental cash flow in year 2 million
Chapter9: Capital Budgeting And Cash Flow Analysis
Section: Chapter Questions
Problem 10P
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Transcribed Image Text:PC Shopping Network may upgrade its modem pool. It last upgraded 1 year ago, when it spent $114 million on equipment with an
assumed life of 4 years and an assumed salvage value of $22 million for tax purposes. The firm uses straight-line depreciation. The old
equipment can be sold today for $86 million. A new modem pool can be installed today for $156 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 $15
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 13%. (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.)
The net cash flow at time 0
million
b-1. What is the incremental cash flow in year 1? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
The incremental cash flow in year 1
million
b-2. What is the incremental cash flow in year 2? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
The incremental cash flow in year 2
million
b-3. What is the incremental cash flow in year 3? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
The incremental cash flow in year 3
million
Transcribed Image Text:c-1. What is the NPV of the replacement project? (Do not round intermediate calculations.Round your answer to 2 decimal places.)
NPV
million
c-2. What is the IRR of the replacement project? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
IR
%
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 $31 million at the end of 3 years. (Do not round intermediate calculations. Round your
answer to 2 decimal places.)
NPV
million
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