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Consider the case of Jones Company: The managers of Jones Company are considering replacing an existing piece of equipment, and have collected the following information: - The new piece of equipment will have a cost of $9,000,000, and it will be depreciated on a straight-line basis over a period of five years. - The old machine is also being depreciated on a straight-line basis. It has a book value of $200,000 (at year 0 ) and three more years of depreciation left ( $50,000 per year). - The new equipment will have a salvage value of $0 at the end of the project's life (year 5). The old machine has a current salvage value (at year 0 ) of $300,000. - Replacing the old machine will require an investment in net working capital (NWC) of $60,000 that will be recovered at the end of the project's life (year 5). - The new machine is more efficient, so the incremental increase in operating income before taxes will increase by a total of $400,000 in each of the next five years (years 1-5). (Hint: This value represents the difference between the revenues and operating costs (including depreciation expense) generated using the new equipment and that earned using the old equipment.) - The project's required rate of return is 11%. - The company's annual tax rate is 30%. ssignment: Chapter 10 Project Cash Flows and Risk

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