8. Replacement analysis Aa Aa E Purple Whale Inc. is a company that produces iBooks, among several other products. Suppose that Purple Whale Inc. considers replacing its old machine used to make iBooks with a more efficient one, which would cost $2,000 and require $280 annually in operating costs except depreciation. After-tax salvage value of the old machine is $400, while its annual operating costs except depreciation are $1,200. Assume that, regardless of the age of the equipment, Purple Whale Inc.'s sales revenues are fixed at $2,500 and depreciation on the old machine is $400. Assume also that the tax rate is 40% and the project's risk-adjusted cost of capital, r, is the same as weighted average cost of capital (WACC) and equals 10%. Although Purple Whale Inc.'s NCFs before replacement are the same over the four-year period, its NCFs after replacement vary annually. The following table shows depreciation rates over four years. Year 1 Year 2 33.33% 44.45% Year 3 Year 4 14.81% 7.41% Depreciation rates Complete the following table and calculate incremental cash flows in each year. Hint: Round your answers to the nearest dollar and remember to enter a minus sign if the calculated value is negative. Year 1 Year 2 Year 3 Year 4 New machine cost Year 0 $2,000 $400 $2,500 $280 $2,500 $280 $2,500 $280 $2,500 $280 After-tax salvage value, old machine Sales revenues Operating costs except depreciation Operating income After-tax operating income Net cash flows after replacement (adding back depreciation) Incremental Cash Flows AAA GA $C $ $ $ C $ C