A company is considering replacing a machine. The old machine is being depreciated by the straight-line depreciation method over a 10 year recovery period from a depreciable cost basis of $120,000. The old machine has a 5 years of remains usable life, at which time its salvage value is expected to be zero, and it can be sold now for $40,000. This machine has a current book value of $60,000.

The purchase price of the new machine is $250,000. Employees were sent to a training course last year on how to use the new machine, the training cost was $5,000. The new machine has a 5-year life and an expected salvage value of $25,000. Annual savings of electricity, labor, and materials from use of the new machine are estimated at $40,000. The company is in a 40 percent tax bracket and its cost of capital is 16%. The MACRS depreciation method will be used and the recovery percentages for asses with a 5-year class life are given below:

Year 1: 20% Year 2: 32% Year 3: 19% Year 4: 12% Year 5: 11% Year 6: 6%

A) What is the initial cash outlay for the new machine?

B) Determine Cash Flows 1-5

C) What is the Cash Flow from salvage value in Year 5

D) Should the new machine be purchased? Why?

Not in Excel!