3. Calculating Free Cash Flows for a Replacement Investment LSM Ltd is considering the replacement of one of its machines. The following infonnation summarizes the new versus old machine costs: New machine Old Machine Annual cost of defects Net operating income Book value of equipment Salvage value (today) Salvage value (Year 5) Shipping cost Installation cost Remaining project life (years) Net operating working capital Salaries Fringe benefits Maintenance 20 580 350 NA 580 100 150 20 NA 30 NA 60 100 10 60 200 20 LSM Ltd faces a 30% marginal tax rate and uses a 15% discount rate to evalune equnmmr purchases for its automobile scrap operation. The appeal of the new machine is that it is more automated (requires two fewer employees to operate the machine). The older machine requires four employees with salaries totaling Tshs 200 million and fringe benelits costing Tshs 20 million. The new machine cuts this total in half. In addition, the new machine is able to separate out the raw materials w of defects which are Tshs 20 million with the new machine compared to Tshs 70 million for hich redaces the annua cost maintenance fees of Tshs 60 million compared to only Tshs 20 million for the older machine Should LSM Ltd replace the older machine with the newer one? owever, the added automation feature comes at the cost of higher anma