Five years ago, a multi-axis NC machine was purchased for the express purpose of machining large, complex parts used in commercial and military aircraft worldwide. It cost \($350,000,\) had an estimated life of 15 years, and O&M costs of \($50,000\) per year. The 5 years have been depreciated for tax purposes as MACRS-GDS 7-year property. The NC machine was originally thought to have a salvage value of \($20,000\) at the end of 15 years but is now believed to have a remaining life of only 5 years with no salvage value at that time. With business booming, the existing machine is no longer sufficient to meet production needs. It can be kept and supplemented by purchasing a new, smaller Machine S for \($210,000\) that will cost \($37,000\) per year for O&M, have a life of 10 years, and have a salvage value of \($210,000(0.8t)\) after t years. As an alternative, a larger, faster, and more capable Machine L can be used alone to replace the current machine. It has a cash price without trade-in of \($450,000,\) O&M costs of \($74,000\) per year, and a 15-year life. The existing NC machine can be sold on the open market for a maximum of \($70,000.\) The salvage value of Machine L is expected to be

\($450,000(0.8t)\) after t years. The after-tax MARR is 12 percent, the tax rate is 40 percent, and the planning horizon is 5 years.

a. Clearly show the cash flow profile for each alternative using a cash flow approach (insider’s viewpoint approach). 

b. Using an EUAC and a cash flow approach (insider’s viewpoint approach), decide which is the more favorable alternative.

c. Using an EUAC and a cash flow approach (insider’s viewpoint approach), decide which is the more favorable alternative, except note that a Section 1031 like-kind property exchange is to be used. The equipment replaced will continue to be replaced by like-kind investments in the United States indefinitely.