Transcribed Image Text
PC Shopping Network may upgrade its modem pool. It last upgraded2 years ago, when it spent $95 million on equipment with an assumedlife of 5 years and an assumed salvage value of $18 million for taxpurposes. The firm uses straight-line depreciation. The oldequipment can be sold today for $80 million. A new modem pool canbe installed today for $150 million. This will have a 3-year lifeand will be depreciated to zero using straight-line depreciation.The new equipment will enable the firm to increase sales by $25million per year and decrease operating costs by $10 million peryear. At the end of 0 years, the new equipment will beworthless. Assume the firm’s tax rate is 35% and thediscount rate for projects of this sort is 10%.a. What is the net cash flow at time 0 if theold equipment is replaced? (Negative amounts should beindicated by a minus sign. Do not round intermediate calculations.Enter your answer in millions rounded to 2 decimalplaces.)(95-18)/5=15.4 Annual depreciation95-(2x15.4)=64.2 Book value at time of saleb. What are the incremental cash flows in years1, 2, and 3? (Do not round intermediate calculations. Enteryour answer in millions rounded to 2 decimal places.)Incremental cash flow = 34.86 million per year  c. What are the NPV and IRR of the replacementproject? (Do not round intermediate calculations. Enter theNPV in millions rounded to 2 decimal places. Enter the IRR as apercent rounded to 2 decimal places.)