4. (23 points) The Revco Implement Company is considering replacing a machine it currently uses to mold agricultural equipment. This machine, the AXCO Series 1 has 6 years of remaining life. If kept, it will have depreciation expenses of $650 for 5 years, $325 for the sixth year. It can currently be sold for $4,000 and its current book value is $3,575. If the Series 1 machine is not replaced, it can be sold for $700 at the end of its useful life.

Revco is considering purchasing the Series 2 machine which costs $13,000 and estimated useful life of 6 years with an estimated salvage value of $2,000. This machine falls into the MACRS 5 year class with depreciation rates of 20%, 32%, 19.2%, 11.52%, 11.52% and 5.76% for years 1 to 6. It is expected that output will increase with the new machine, so sales would rise by $2,000 per year. Since the machine is more efficient, expenses are expected to decrease by $1,850 per year. To support greater sales, inventories will increase by $2,900, but accounts payable will also increase by $720. Working capital changes only occur in year 0 and year 6. The companys cost of capital is 15%, and their marginal tax rate is 40%. Should the machine be replaced? (Calculate all cash flows for years 0 through 6 and then a NPV).