A machine currently in use was originally 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 usable life remaining. The current machine can be sold today to net $42,000 after removal and cleanup costs. 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 depreciation, interest, and taxes 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 on page 166 contains the applicable MACRS depreciation percentages.)

Table 4.2: 

a. Determine the initial investment associated with the proposed replacement decision.
b. Calculate the incremental operating cash flows for years 1 to 4 associated with the proposed replacement. Only depreciation cash flows must be considered in year 4.
c. Calculate the terminal cash flow associated with the proposed replacement decision.
d. Depict on a time line the relevant cash flows found in parts a, b, and c that are associated with the proposed replacement decision, assuming that it is terminated at the end of year 3.

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TABLE 4.2 for First Four Property Classes Recovery year 1 2 3 4 5 6 7 8 Rounded Depreciation Percentages by Recovery Year Using MACRS 9 10 11 Totals 3 years 33% 45 15 7 100% Percentage by recovery year" 5 years 7 years 14% 20% 32 25 19 18 12 12 12 5 100% 9994 | 100% 10 years 10% 18 14 12 a ∞on 666 9 8 7 +18 100%