Alpha Beta Company is examining the purchase of a new blending machine to replace the existing one. The new machine costs $7,520,000 with an economic life of 4 years. The current book value and the salvage value today of the existing blending machine are respectively $5,850,000 and $6,050,000. The existing blending machine still has four years of economic life left. The annual depreciation expense for the new machine and old machine are calculated using a straight-line depreciation method. Both machines will have zero salvage value in four years. There will be an annual cost saving of $625,000 if the current machine is replaced by the new machine. Net working capital of $420,000 will be needed immediately if the new blending machine is purchased. The company has a 35% tax rate. Suppose the required rate of return on this investment is 16%. Should the company replace the current blending machine with a new one? Calculate the net present value of the decision of replacing the existing blending machine.

(13 marks)

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