Finansal Yönetim - II Replacement Decision Example Assume Company X purchased a computer 2 years ago for $120,000 The computer had 6 yeasr useful life The Company decide to sell this old computer today and plans to buy a new one. The Old computer can be sold for $37,600 and new one can be bought for $180,000 The new computer also has a 6 years useful life The new one will provide Cost Savings and Operating Benefits, compared to old one, of $42,000 per year for the next 6 years. The firm has a 35% tax rate and 10% cost of capital Determine NPV downloaded from fatihbook.com l Sd-..l~~AJ Step-l: Compute the book value of old computer: ~-\\ ~ ( \\ )\ W~ use 5 ~ MAc(l.~ -for f, ~eors I,-::,e.of _ lloa oeD "(0.2.0) ~ 1," 000 'l.,~b'2-·,,0 1 _0,'200 'l. _ 10, 3'20 '3 _ 0, \~'l.. '-1 _0, lIS S _ 0, ,II '''-----II Step-2: Determine whether the book value is bigger than the sales price in order to find out the tax consequences: 8=1<. Value - S'''Iles p",'U, (old) ~ 5rbCO - J7'- 6QO ~ 2.0000 "/.r ·k. 600(. valve if b'-"9i!r Ik<2r\ sal'-f priu/ -I~ere ;, Ci -hI' loU 0( CCV1 b", <-,,-I1e,-, o+f" Step-3: Add the tax benefit to the sales price Step-4: Determine the net cost of new computer PriLe. 0,+ (It-v- CCX'r'(Jv kr _ Los t.., I AflOLN frorv-- r Ci I e of old corvpv-kr ( \'3000C) - tty 60:::> ) $ 135400 "The question at this point than becomes are the incremental (extra) gains from the new computer compares to doze of old computer is large enough to jastify the nt cost of new computer. " Step-5: Determine the annual depreciation on the new computer ()e.ruc . (1oH - \'Do 0<00 \ 00 000 \ 'So 00,:::1 (~o 0'::>0 \~""'=..:;) \ b.o o.o~ . (.l~(c!/1~. D~. O. "Loo 0, 3'2.,0 0, 13'1.. 0,115 0, 1\(' 0,05'& 3{, lOCO 5=rbo::;, 3~ 56\? '2-0 =1--00 20 :ffio " All these numbers must be equal to depreciation base" 10 I..( 40 __ 7 I,&) 000 J Step-6: Determine the annuaL depreciation on the oLd computer (rest of its usefuL Life) "The oLd computer has 6 years, 2 years has gone, we have 4 years" '-lear { '] ~ I 11..0 COO 10,191- ~3 CL,O L\ E,-- 1- 1'2.0000 o ,liS 13 'BoO ., <..- 3 11..0ep ~ I\~V ::lb ocx:> S'~ 600 ::Ie., 5 b 0 '1.0"1-00 1.0 'i-oo 104" 0 {)ep 01'1 Did {ncreN' . {J(./J '1.. 3D <.,0 11.%0 I J 'B 00 I.,~ goo I'J SOO 'La '1-60 b 9he 1'1 -:}-yO w'}-= IOc..,c..,O TOl<~.fe. TQ~ 5l,...'e.ld f!&\ e.{;'-f 0.35 £'5']6 o .Jf IS'JJO o.X '11..66 o.,3( c,~Oj o .j( 1'2.£"5 0·']1 JbS~ Step-8: CaLcuLate after tax cost savings of new computer compared to oLd one je.an Cos.\- 50"''''3 ~ L Go I'r2.c+e A.r-iet ~\C SQU"Yj' ~'l.OOO 0.65 -z.~ .300 c,1..ooo o· 65 'Z..~ 300 l.,,'Looo 0.6$ 7.:~ :10';:) downloaded from c.,1..DOO (!).6S 'L~ '1010 fatihbook.com ,1.. DC"::> o.bS -z..~ '1010 £'1. 00 '::> o·{:,f 1. -=t- '3-0::> [12-47] Step-9: Combine Step 7 (Tax SchieLd Benefits) and Step 8 (After Tax Savings( together in order to find out annuaL benefits LApP. Cl J IO~) PaJfA+ UC-ilue "ec.t'~ To.y: ~ 1,.,;e.1J 4f-W Tcx 'L<>-I- ! Pre,eo+ lJal.e 4 5 36 1..-1- 'J1Xl '3\'OC!f, O,90~ 1..13939 1.1- Joo y? 630 O,~'Lb 35211- '1.. lS no 'Jy;66 0,1-$ I 'l.5 95"9 "'I-Hb 7..~'JoJ ') 32 loj D,b'ilj 'U '330 '" So;) '1... '.f- JOo? " 34 5(, S c£J, b1..1 ?f ljSl ..\ '1-1 ~s n 'J .".;J 0,56'-1 11-4S-g 'l.. :r '1oo? 'J I) 9S' '-t - Co ']6 54 150.5510 Step-10: Use the PV of incrementaL benefits (Step 9) and the net cost of new computer (Step 4) to find out the NPV (- ) 1555 0 " This is a pozitive NPII, Company should buy the new computer"