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Question - PC Shopping Network may upgrade its modem pool. It last upgraded 2 years ago, when it spent $120 million on equipment with an assumed life of 5 years and an assumed salvage value of $15 million for tax purposes. The firm uses straight-line depreciation. The old equipment can be sold today for $80 million. A new modem pool can be installed today for $150 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 30% and the discount rate for projects of this sort is 9%.
Required -
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 (i) 1; (ii) 2; (iii) 3?
c. What is the NPV of the replacement project?
d. What is the IRR of the replacement project?
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