Asset replacements involve retiring one asset and replacing it with a more efficient asset.

Cost of new drill press $190,000

Plus Shipping and installation charges 10,000

Equals Installed cost $200,000

Plus Increase in initial net working capital 0

Minus Proceeds from sale of old drill press 40,000

Equals Net investment before taxes $160,000

Plus Tax on gain from sale of old drill press (40% $40,000) 16,000

Equals Net investment (NINV) $176,000

Assume further that while the old drill press required two operators, the new drill press is more automated and needs
only one, thereby reducing annual operating costs from $40,000 to $20,000 during the projects first year. After the first
year, annual operating costs of the new drill press are expected to increase by $1,000 a year over the remaining life of the
project.14 The old machine is fully depreciated, whereas the new machine will be depreciated on a straight-line basis. The
marginal tax rate of 40 percent applies. Assume also that the companys net working capital does not change as a result
of replacing the drill press. The first-year net cash flow resulting from the purchase of the new drill press can be computed
by substituting Rw $85,000, Rwo $70,000, Ow $20,000, Owo $40,000, Depw $20,000 ( $200,000/10), Depwo
$0, T 0.40, and NWC $0 into Equation 9.3 as follows: