I am lost on how to go about answering this question. Any assistence would be greatly appreciated!
Reeva Singer, an analyst with Big Lee Corporation (BLC), is evaluating more efficient higher-capacity equipment to replace existing production equipment. “Option A” involves replacing existing equipment with new equipment of identical remaining life. Characteristics of existing and new equipment under Option A appear in Exhibit 1.
Characteristic
Old Equipment
New Equipment
Current BV
$300,000
Current MV
$500,000
$750,000
Remaining life in years
10
10
Annual sales
$240,000
$400,000
NWC Inv
$80,000
Cash operating expenses
$60,000
$75,000
Depreciation
$30,000
$75,000
E(BVT)
$0
$0
E(SVT)
$75,000
$150,000
Tax rate
Required Return
30.0%
7.0%
30.0%
7.0%
Using information in Exhibit 1, Option A incremental NPV will be closest to:
- A. $239,000.
- B. $359,000.
- C. $485,000.