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27/08/2022
Suppose we are thinking about replacing an old computer with a new one. The old one cost us $648,000; the new one will cost $1,314,000. The new machine will be depreciated straight-line to zero over its 5-year life. It will probably be worth about $243,000 after five years.The old computer is being depreciated at a rate of $216,000 per year. It will be completely written off in three years. If we don’t replace it now, we will have to replace it in two years. We can sell it now for $342,000; in two years, it will probably be worth $144,000. The new machine will save us $234,000 per year in operating costs. The tax rate is 36 percent and the discount rate is 8 percentRequired: (a) Suppose we recognize that if we don’t replace the computer now, we will be replacing it in two years. Should we replace now or should we wait? Hint: What we effectively have here is a decision either to “invest” in the old computer (by not selling it) or to invest in the new one. Notice that the two investments have unequal lives. The EAC for investing in the new computer is $, while the EAC for investing in the old computer is $…. Thus, we should OR not should replace the old computer. (Do not include the dollar sign ($). (b) Suppose we consider only whether we should replace the old computer now without worrying about what’s going to happen in two years. Should we replace it or not? Hint: Consider the net change in the firm’s aftertax cash flows if we do the replacement. The NPV is $ and thus we should OR not should replace the old computer. Question #2Your company has been approached to bid on a contract to sell 7,200 voice recognition (VR) computer keyboards a year for 4 years. Due to technological improvements, beyond that time they will be outdated and no sales will be possible. The equipment necessary for the production will cost $1.728 million and will be depreciated on a straight-line basis to a zero salvage value. Production will require an investment in net working capital of $54,000 to be returned at the end of the project, and the equipment can be sold for $144,000 at the end of production. Fixed costs are $360,000 per year, and variable costs are $119 per unit. In addition to the contract, you feel your company can sell 2,160, 4,320, 5,760, and 3,600 additional units to companies in other countries over the next four years, respectively, at a price of $198. This price is fixed. The tax rate is 40 percent, and the required return is 9 percent. Additionally, the president of the company will undertake the project only if it has an NPV of $72,000. Therefore, you should set a bid price of $ for the contract.
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