A firm is considering replacing an existing piece of equipment with a more sophisticated machine. The existing machine was purchased 3 years ago at an installed cost of $110,000; it was being depreciated under MACRS using a 5-year recovery period. The existing machine is expected to have a usable life of 5 more years. The new machine costs $170,000 and requires $20,000 in installation costs; it has a 5-year usable life and would be depreciated under MACRS using a 5-year recovery period. The firm can currently sell the existing machine for $105,000 without incurring any removal or cleanup costs. The firm is subject a 40% tax rate. The estimated earnings before depreciation, interest, and taxes over the 5 years for both the new and the existing grinder are shown in the following table. Year New Machine Existing Machine 1 180,000 $170,000 2 180,000 160,000 3 180,000 150,000 4 180,000 150,000 5 180,000 150,000

5 year MACRS depreciation percentages Year Percentage

1 0.2 2 0.32 3 0.19 4 0.12 5 0.12 6 0.05

a. Calculate the book value of the existing machine. $

b. Calculate the tax effect from the sale of the existing asset. $

c. Calculate the initial investment. $

d. Calculate the incremental CF at the end of year 1. $

e. Calculate the incremental CF at the end of year 2. $