Analyze the replacement. The old machine was purchased 2 years ago for $15,000, it falls into the MACRS 5-year class; and it has 2 years remaining life with a $1,000 salvage value 2 years from now. The current market value of the machine is $4,000.

The price of a new machine is currently. $30,000, plus an additional $1,500 for installation and $500 for shipping. The new machines fallsinto the MACRS 5-year class, has a 2 year economic life, and a $20,000 salvage value. The new machine will require a $3,000 increase in inventory, and accounts payable is expected to increase by $2,300. The new machine is expected to increase revenue by $6,000 per year and decrease costs by $1,000 per year. The firm has a 10 percent cost of capital and marginal tax rate of 40 percent. The MACRS 5-year class uses the folowing percentages: 20, 32, 19, 12, 11, 6 (in that order) ( ROUND ALL CFS to the nearest dollar)

1. What is the ney cash investment at t=0?

a. outflow of 26720

b. outflow of 27420

c. outflow of 27880

d. outflow of 28090

2. What is the operating cash flow (OCF) for year 2 (at t=2)?

a. 6,040

b. 5,460

c. 8,296

d. 7,576

3. What is the missed tax effect from selling the old machine today rather than in two years?

a. cash outflow of 400

b. cash outflow of 620

c.cash inflow of400

d.cash inflow of620

4. Should the firm replace its older machine with the new machine?

a. No, the incremental cash flow from the new machine is insufficient to justify investing in the new machine. Buying the new machine would decrease the value of the firm by 4,375.

b.No, the incremental cash flow from the new machine is insufficient to justify investing in the new machine. Buying the new machine would decrease the value of the firm by 1,1815.

c.No, the incremental cash flow from the new machine is insufficient to justify investing in the new machine. Buying the new machine would decrease the value of the firm by 5,706.

d.No, the incremental cash flow from the new machine is insufficient to justify investing in the new machine. Buying the new machine would decrease the value of the firm by 790.