At times firms will need to decide if they want to continue to use their current equipment or to…

At times firms will need to decide if they want to continue to use their current equipment or to replace the equipment with newer equipment. The company will need to do a replacement analysis to determine which option is the best financial decision for the company.

Price Co. is considering replacing an existing piece of equipment. The project involves the following:

– The new equipment will have a cost of $1,200,000, and it will be depreciated on a straight e basis over a period of six years (years 1-6)

– The old machine is also being depreciated on a straight-line basis. It has a book value of $200,000 (at year 0) and four more years of depreciation left ($50,000 per year)

– The new equipment will have a salvage value of $0 at the end of the project’s life (year 6). The old machine has a current salvage value (at year 0) of $300,000 an investment in net working capital (NWC) of $20,000 that will be recovered at the end of the project’s life.

– Replacing the old machine will require The new machine is more efficient, so the firm’s incremental earnings before interest and taxes (EBIT) will increase by a total of $600,000 in each of the next six years.

– The project’s cost of capital is 13%.

– The company’s annual tax rate is 40%.

Compute the incremental cash flows associated with the replacement of the old equipment with the new equipment