Redo Problem 14.12 with the following additional information. The old machine has been fully depreciated.

Question:

Redo Problem 14.12 with the following additional information.
• The old machine has been fully depreciated.
• The new machine will be depreciated under a three-year MACRS class.
• The marginal tax rate is 40%, and the firm's after-tax is 12%.
In Problem 14.12
A five-year-old defender has a current market value of $4,000 and expected O&M costs of $3,000 this year, increasing by $1,500 per year. Future market values are expected to decline by $1,000 per year. The machine can be used for another three years. The challenger costs $6,000 and has O&M costs of $2,000 per year, increasing by $1,000 per year. The machine will be needed for only three years, and the at the end of that time is expected to be $2,000. The is 15%.
(a) Determine the annual cash flows for retaining the old machine for three years.
(b) Determine whether now is the time to replace the old machine. First show the annual cash flows for the challenger. Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... MARR
Minimum Acceptable Rate of Return (MARR), or hurdle rate is the minimum rate of return on a project a manager or company is willing to accept before starting a project, given its risk and the opportunity cost of forgoing other...