# solution

Year 1 Depreciation rates Year 2 44.45% 33.33% Year 3 14,81% Year 4 7.41% Complete the following table and calculate incremental cash flows in each year, Hint: Round your answers to the nearest dollar and remember to enter a minus sign if the calculated value is negative. Year o Year 1 Year 2 Year 3 Year 4 \$2,000 \$400 \$2,500 \$2,500 \$2,500 New machine cost After tax salvage value, old machine Sales revenues Operating costs except depreciation Operating income After-tax operating income Net cash flows after replacement (adding back depreciation) Incremental Cash Flows \$2,500 \$280 \$280 \$280 \$1,924 \$280 \$2,072 S \$1,331 \$ \$1,154 \$1,243 \$799 \$1,688 \$1,154 \$1,391 \$748 \$510 \$451 Green Moose Industries is a company that produces iBooks, among several other products. Suppose that Green Moose Industries considers replacing its old machine used to make iBooks with a more efficient one, which would cont \$2,000 and require \$280 annually in operating costs except depreciation. After-tax salvage value of the old machine is \$400, while its annual operating costs except depreciation are \$1.200. Assume that, regardless of the age of the equipment, Green Moose Industries’s sales revenues are fixed at \$2,500 and depreciation on the old machine is \$400. Assume also that the tax rate is 10% and the project’s risk adjusted cost of capital, is the same as weighted average cost of capital (WACC) and equals 10% Based on the data, net cash flows (NCFS) before replacement are L and they are constant over four years, \$140 Although Green Moose Industries’s NCFS before replacement are Following table shows depreciation rates over four years. over the 4-year period, its NCFS after replacement varv annually. The 5940 \$540 Year 1 Year 2 Year 3 Year \$900 Next evaluate the incremental cash flows by calculating the net present value (NPV), the internal rate of return (IRR), and the modified IRR (MIRR). Assume again that the cost of financing the new project is the same as the WACC and equals 10%. Hint: Use a spreadsheet program’s functions or use a financial calculator for this task. the MIRR is lower than the IRR 7 NPV IRR MIRR the NPV is small Evaluation the NPV is positive Based on the evaluation, replacing the old equipment appears to be a decision because __

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