A commercial printer is considering the replacement of one of its printing machines. Assume that the new machine can be depreciated on a straight-line basis over its eight-year (8) expected life until it is sold for its expected salvage value at that time. Assume further that the appropriate tax rate is 35% and that the current estimate of the companys weighted average cost of capital is 8%. You have been hired to analyze the opportunity and find that a new printing machine can be purchased at a cost of $320,000 and will have a salvage value after 8 years of $40,000. The old machine can be sold today for $30,000 and can be depreciated at an annual rate of $8,000 for each of its remaining 8 years of life if it is not replaced. Finally, the new printing machine is more efficient than the existing one and is expected to reduce operating expenses by $60,000 per year.

1. Given the possibility of replacement, what is the change in annual depreciation?

2. What will be the change in the annual tax shield?

3. What is the present value (t=0) of the after-tax operating cash flow that the company will earn if the replacement is undertaken?