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A Firm Is Considering an Investment of $480,000 in New

question 116

Essay

A firm is considering an investment of $480,000 in new equipment to replace old equipment with a book value of $95,000 and a market value of $63,000.If the firm replaces the old equipment with new equipment,it expects to save $120,000 in operating costs the first year.The amount of savings will grow at a rate of 8 percent per year for each of the following five years.Both pieces of equipment belong to asset class 8,which has a CCA rate of 20 percent.The salvage values of both the old equipment and the new equipment at the end of six years are $11,000 and $78,000,respectively.There are other assets in the asset class when the project terminates.In addition,replacement of the old equipment with the new equipment requires an immediate increase in net working capital of $50,000.The firm's marginal tax rate is 35 percent and cost of capital is 11 percent.
A) What is the initial after-tax cash flow?
B) What is the present value of the incremental CCA tax savings?
C) What is the present value of the incremental after-tax operating cash flows?
D) What is the present value of the incremental ending after-tax cash flow?
E) What is the NPV of the replacement project?

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Definitions:

GUI

Stands for Graphical User Interface, a visual way of interacting with computers and applications through elements like windows, icons, and buttons.

Modified First Window

Refers to the altered initial interface or window of an application from its default state, typically involving changes made by programming or user customization.

actionPerformed Method

A method in Java that handles action events, typically implemented from an ActionListener interface to respond to user interactions.

ActionListener Interface

An interface in Java used to receive action events, typically from GUI elements like buttons.