=+LG 3 LG 4 ST11–2 Determining net cash flows A machine in use by a partnership was purchased 2 years ago for $40,000. The machine is being depreciated under MACRS, using a 5-year recovery period. It has 3 years of life remaining, and it can be sold today to net

$42,000. A new machine, using a 3-year MACRS recovery period, can be purchased at a price of $140,000. It requires $10,000 to install and has a 3-year usable life. If the new machine is acquired, the investment in accounts receivable will be expected to rise by $10,000, the inventory investment will increase by $25,000, and accounts payable will increase by $15,000. Earnings before interest, taxes, depreciation, and amortization are expected to be $70,000 for each of the next 3 years with the old machine and to be $120,000 in the first year and $130,000 in the second and third years with the new machine. At the end of 3 years, the market value of the old machine will equal zero, but the new machine could be sold to net $35,000 before taxes. The firm is subject to a 40% tax rate. (Table 4.2 contains the applicable MACRS depreciation percentages.)