Required

1. Determine the relevant (i.e., differential) cash flows (after-tax) at each of the following three points
related to this asset-replacement decision: (1) project initiation (i.e., time 0), (2) project operation (i.e.,
end of years 1, 2, and 3), and (3) project disposal/termination (i.e., end of year 3).
2. What is the estimated net present value of the decision to replace asset A (the existing asset) with asset
B? Use the built-in NPV function in Excel and round your final answer to the nearest whole dollar.
3. What is the weighted-average cost of capital (WACC) that would make the company indifferent between
keeping or replacing asset A? Use the Goal Seek option in Excel to answer this question; round your
answer to 2 decimal places (e.g., 13.418% = 13.42%.)
12-45 Machine Replacement with Tax Considerations; Spreadsheet Application; Double-
Declining-Balance (DDB) Depreciation A computer chip manufacturer spent $2,500,000
to develop a special-purpose molding machine. The machine has been used for one year and is
expected to be obsolete after an additional 3 years. The company uses straight-line (SLN) depreciation
for this machine.
At the beginning of the second year, a machine salesperson offers a new, vastly more efficient
machine. This machine will cost $2,000,000, reduce annual cash manufacturing costs from
$1,800,000 to $1,000,000, and have zero disposal value at the end of 3 years. Management has
decided to use the double-declining-balance (DDB) depreciation method for tax purposes for this
machine if purchased. (Note: Make sure to switch to SLN depreciation in year 3 to ensure that the
entire cost of the asset is written off. You may find it useful to use the VDB function in Excel to
calculate depreciation charges.)
The old machine’s salvage value is $300,000 now and is expected to be $50,000 three years from
now; however, no salvage value is provided in calculating straight-line (SLN) depreciation on the
old machine for tax purposes. The firm’s income tax rate is 45%. The firm desires to earn a minimum
after-tax rate of return of 8%.
Required
1. What is the present value (rounded to the nearest whole dollar) of tax savings