Question

Dalton Inc. is thinking about replacing an old computer with a new one. The new one will cost $1,000,000 and will have a life of FOUR years. The new computer qualifies as 5-year MACRS property. Years Depreciation rate 1 20% 2 32% 3 19% 4 12% It will probably be worth about $360,000 after FOUR years. The old computer is being depreciated at a rate of $100,000 per year. It will be completely written off in FOUR years, at that time it will have zero resale value. We can sell it now for $420,000 after taxes. The new machine will save us $200,000 per year in operating costs. The tax rate (federal plus state) is 25 percent and WACC is 8 percent. 1) What is the TOTAL FREE CASH FLOW FOR YEAR 4? Free cash flow = Total Initial Investment + Total annual project CF + Total Salvage Value 2) What is the NPV?

          Dalton Inc. is thinking about replacing an old computer with a new one. The new one will cost $1,000,000 and will have a life of FOUR years. The new computer qualifies as 5-year MACRS property.
Years  Depreciation rate
1   20%
2   32%
3   19%
4   12%
It will probably be worth about $360,000 after FOUR years. The old computer is being depreciated at a rate of $100,000 per year. It will be completely written off in FOUR years, at that time it will have zero resale value. We can sell it now for $420,000 after taxes. The new machine will save us $200,000 per year in operating costs. The tax rate (federal plus state) is 25 percent and WACC is 8 percent. 
1) What is the TOTAL FREE CASH FLOW FOR YEAR 4?
Free cash flow = Total Initial Investment + Total annual project CF + Total Salvage Value
2) What is the NPV?

Added by Brian M.

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