Find the present value of the incremental cash flows, Financial Management

PC Shopping Network may upgrade its modem pool. It last upgraded 2 years ago, when it spent $115 million on equipment with a life of 5 years and a salvage value of $15 million. The old equipment can be sold today for $80 million. A technology consultant hired by PC Shopping Network has suggested that a new modem pool can be installed today for $150 million. This will have a 3-year life with a salvage value of $30 million. Both the 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. The consultant's fee, payable this month, is $10,000.

The new equipment will enable the firm to increase sales by $25 million per year and decrease operating costs by $10 million per year. It will also require the firm to keep $5 million of extra inventory on hand. The additional inventory will not be needed after the useful life of the equipment. Assume the firm's tax rate is 35% and the discount rate for projects of this sort is 12%.

a.  If the company decides to replace their existing modem pool with the new equipment, sales will increase and costs will decline. What is the impact of these changes for the firm's cash flow? In other words, find the present value of the incremental cash flows over the life of the project that result from the changes in sales and costs.

b. Replacing the old equipment with new equipment results in changes to the company's asset class and therefore changes  to its depreciation tax shield. Find the PV of  the depreciation tax shield associated with replacing the equipment.

c.  Should the company  replace the modem pool? Support your decision by finding the NPV of replacing the equipment.

Posted Date: 2/15/2013 7:25:06 AM | Location : United States







Related Discussions:- Find the present value of the incremental cash flows, Assignment Help, Ask Question on Find the present value of the incremental cash flows, Get Answer, Expert's Help, Find the present value of the incremental cash flows Discussions

Write discussion on Find the present value of the incremental cash flows
Your posts are moderated
Related Questions
Explain the difference between the discounted free cash flow model as it is applied to the valuation of common equity and as it is applied to the valuation of complete businesses.

What are the Drawbacks of benchmarking -  Benchmarking systems and programmes can be costly and time consuming -  Diversity and complexity of information can 'overload 'mana

Geographical Classification of Mutual Funds : Nations' boundaries provide territorial restrictions on the sale and purchase of mutual fund units or shares as is the case in com

The theoretical spot rates for treasury securities represent the appropriate set of interest rates that should be used to value the risk from default-free cash fl

WAYS AND MEANS ADVANCES (WMAs) WMA is not a permanent source of financing government deficit. But, this is likely to provide greater autonomy to the RBI in conducting monetary

International bonds are divided into two categories namely, foreign bonds and euro bonds. Foreign bonds are issued by a borrowing company in another

what are the basic assumptions of financial management?

Assume there exists a nontradable asset with a perfect positive correlation along with a portfolio T of tradable assets. How will the nontradable asset be priced? The nontradable

QUESTION 1 (a) What do you understand by the term Civil Society Organisations? (b) Distinguish between sectional and promotional groups. Give examples to support your answer

PIAC was apparently negatively affected by the safety and health concerns of the EU. With 27 countries raising public concern, PIAC's corporate image is likely to have been spoilt