Calculate the npv using replacement chains

Question

Problem:

Destination Hotels currently owns an older hotel on the best beachfront property on Hilton Head Island, and it is considering either remodeling the hotel or tearing it down and building a new convention hotel, but because they both would occupy the same physical location, the company can only do one-that is, these are mutually exclusive projects. Both these projects have the same initial outlay of $1,000,000. The first project, since it is a remodel of an existing hotel, has an expected life of 8 years and will provide free cash flows of $250,000 at the end of each year for all 8 years. In addition, this project can be repeated at the end of 8 years at the same cost and with the same set of future cash flows. The proposed new convention hotel has an expected life of 16 years and will produce cash flows of $175,000 per year. The required rate of return on both of these projects is 10 percent.

Requirement:

Question: Calculate the NPV using replacement chains to compare these two projects.

Note: Please show how to work it out.

Answer 1

Xyz manufacturing corporation has production equipment that has 4yrs of remaining life. The equipment was purchased as year ago at a cost of $10000. The annual depreciation for this machine is $1800 and its expected salvage value is $1000. The equipment can be sold today for $8000. The company has been considering the purchase of a new machine that will replace the existing one. The new equipment costs %15000 and would increase sales through increased production by $2000 per year and decrease operating costs by $1000 per year. The equipment falls into the 3 yr MACRS class and will be worthless after 4yts. The applicable depreciation rates r 0.33, 0.45, 0.15 and 0.07. The company's tax rate is 40% and its cost of capital is 12%. By how much would the value of the company change if it accepts the replacement projects?