The modem pool at PC Shopping Network may be upgraded. It was last renovated two years ago, spending $170 million on equipment with a 5-year expected life and a $20 million salvage value for tax purposes. Straight-line depreciation is used by the company. The obsolete equipment is currently worth $120 million. For $210 million, a new modern pool can be built right now. This will be depreciated to zero over a three-year period using straight-line depreciation. The new equipment will allow the company to raise sales by $22 million per year while lowering operational costs by $11 million. The new equipment will be worthless in three years. Assume that the firm’s tax rate is 35% and that the discount rate for projects like this is 11%.
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