CME Inc. must develop the relevant cash flows for a replacementcapital investment proposal. The proposed asset costs $50,000 andhas installation costs of $3,000. The asset will be depreciatedusing a five-year recovery schedule. The existing equipment, whichoriginally cost $25,000 and will be sold for $10,000, has beendepreciated using an MACRS five-year recovery schedule and threeyears of depreciation has already been taken. The new equipment isexpected to result in incremental before-tax net profits of $15,000per year. The firm has a 40 percent tax rate. Note: Assume thatboth the old and the new equipment will have terminal values of $0at the end of year 5. The WACC for Cuda Marine Engines, Inc. is10%.
15- Determine the net present value (NPV).
16- Determine the internal rate of return (IRR).
17- Make the recommendation to accept or reject the replacement,and justify your answer.
