Posted: April 28th, 2016
BPA Corporation is considering the purchase of a new electronic painting equipment to replace the existing equipment that has a book value of 3,000 and can be sold for 1,500. The old equipment is being depreciated on a straight line basis and its estimated salvage value 3 years from now is zero. The new equipment will reduce costs (before taxes) by 7,000/year. The new equipment has a 3-year life, it costs 14,000 and it can be sold for an expected 2,000 at the end of the third year. The new equipment would be depreciated over its 3-year life using the MACRS method. BPA’s cost of capital is 16 percent and its tax rate is 40 percent
Level of Detail: Show all work
1) Calculate Net Investment at t0 :
a.Gain from disposing old machine:
Dep. of old machine:
Book Value of the old machine
Gain from selling the old machine
b) Net Investment
2) Calculation of Incremental Operating Cash Flows for Each Year:
b) Calculation of Incremental Operating Cash Flows: Let us consider the effect of this replacement on income statement and operation cash flow in the first year of replacement.
IOCFt = (?S t – ?OC t)(1 – T) + ?Dep t (T)
3) Incorporating Opportunity costs, if any.
4) Project Evaluation.
Use capital budgeting techniques to evaluate the replacement project (NPV, IRR, MIRR, PBP, or PI
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