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4. Johnson Co. is considering replacing an existing piece ofequipment. The project involves the following:

- The new equipment will have a cost of $1,200,000, and it willbe depreciated on a straight line basis over a period of six years(years 1-6)

- The old machine is also being depreciated on a straight-linebasis. It has a book value of $200,000 (at year 0) and four moreyears of depreciation left. ($50,000 per year)

- The new equipment will have a salvage value of $0 at the endof the project's life (year 6). The old machine has a currentsalvage value (at year 0) of $300,000.

- Replacing the old machine will require an investment in networking capital (NWC)_of $50,000 that will be recovered at the endof the project's life (year 6)

- The new machine is more efficient, so the firm's incrementalearnings before interest and taxes (EBIT) will increase by a totalof $700,000 in each of the next six years (year 1-6). Hint: Thisvalue represents the difference between the revenues and operatingcosts (including depreciation expense) generated using the newequipment and that earning using the old equipment.

- The projects cost of capital is 13%.

- The company's annual tax rate is 30%.

a. Complete the following table and computer the incrementalcash flows associated with the replacement of the old equipmentwith the new equipment.

	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6
Initial investment	________	NoAnswerNeeded	NoAnswerNeeded	NoAnswerNeeded	NoAnswerNeeded	NoAnswerNeeded	NoAnswerNeeded
EBIT	NoAnswerNeeded	________	________	________	________	________	_700,000
- taxes	NoAnswerNeeded	________	________	________	________	________	________
+ new depreciation	NoAnswerNeeded	________	________	________	________	________	________
- old depreciation	NoAnswerNeeded	________	________	________	________	NoAnswerNeeded	NoAnswerNeeded
+ salvage value	________	NoAnswerNeeded	NoAnswerNeeded	NoAnswerNeeded	NoAnswerNeeded	NoAnswerNeeded	NoAnswerNeeded
- tax on salvage	________	NoAnswerNeeded	NoAnswerNeeded	NoAnswerNeeded	NoAnswerNeeded	NoAnswerNeeded	NoAnswerNeeded
- NWC	________	NoAnswerNeeded	NoAnswerNeeded	NoAnswerNeeded	NoAnswerNeeded	NoAnswerNeeded	NoAnswerNeeded
+ recapture of NWC	NoAnswerNeeded	NoAnswerNeeded	NoAnswerNeeded	NoAnswerNeeded	NoAnswerNeeded	NoAnswerNeeded	________
Total free Cash Flows	________	________	________	________	________	690,000	________

b. The net present value (NPV) of this replacement projectis:
           a. $1,901,642

           b. $1,405,562

           c. $1,653,602

           d. $1,240,202