3.5 Summary and Conclusions 91 Poldham Industries is considering replacing a five-year old machine with an original life of 10 years, a cost of $100,000, and a zero saivage value, with a new and more efficient machine. The new machine will cost $200,000 installed and will have a 10-year life. The new machine will increase sales by $25,000 and decrease scrap cost by $10,000 per year. The old machine can be sold currently at $50,000, and Oldham's marginal tax rate is 50%. Assume straight-line depreciation and a 10% investment tax credit for both the old and the new machines. A prorated portion of any investment tax credit must be returned to the IRS for equipment sold before the end of its depreciable life; that is, if half the equipment's life remains, then half the ITC is reclaimed by the IRS. Assume depreciation is taken on 100% of the cost of equipment. a. What is the initial cash outflow generated by the machine replacement? b. What are the annual operating cash flows generated by this project? c. What is the net present value of this replacement project, given a 12% cost of capital