USA Homework Help

[martasyntia]

Hello everyone, I have troubles getting the right answer for the following exercise. Could someone help me get answers and tell me how they got it please?

PC Shopping Network may upgrade its modem pool. It last upgraded 2 years ago, when it spent $170 million on equipment with an assumed life of 5 years and an assumed salvage value of $20 million for tax purposes. The firm uses straight-line depreciation. The old equipment can be sold today for $120 million. A new modem pool can be installed today for $210 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 $22 million per year and decrease operating costs by $11 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 11%.

a. What is the net cash flow at time 0 if the old equipment is replaced?

b. What are the incremental cash flows in years 1, 2, and 3?

c. What are the NPV and IRR of the replacement project?

I would greatly appreciate it, thank you!

 

[Drmdcpa]

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