Assume that it is January $1,2022,$ and that the Mendoza Company is considering the replacement of a machine that has been used for the past $3$ years in a special project for the company. This project is expected to continue for an additional $5$ years $($i$.$e$.,$ until the end of $2026).$ Mendoza will either keep the existing machine for another $5$ years $(8$ years total$)$ or replace the existing machine now with a new model that has a $5-$year estimated life. Pertinent facts regarding this decision are as follows:

Keep Existing Machine Purchase New Machine

Purchase price of machine $($including transportation, setup charges, etc.$)$ $ $150,000$ $ $190,000$

Useful life $($determined at time of acquisition$)8$ years $5$ years

Estimated salvage value, end of $2026*$ $ $20,000$ $ $25,000$

Expected cash operating costs, per year:

Variable $($per unit produced$/$sold$)$ $ $0\mathrm{.}25$ $ $0\mathrm{.}19$

Fixed costs $($total$)$ $ $25,000$ $ $24,000$

Estimated salvage $($terminal$)$ values:

January $1,2022$ $ $68,000$

December $31,2026$ $ $12,000$ $ $22,000$

Net working capital committed at time of acquisition of existing machine $($all fully recovered at end of project, December $31,2026)$ $ $30,000$

Incremental net working capital required if new machine is purchased on January $1,2022($all fully recovered at end of project, December $31,2026)$ $ $10,000$

Expected annual volume of output$/$sales $($in units$),$ over the period $2022$ to $2026500,000500,000$

$*$Note: These amounts are used for depreciation calculations.

Assume further that Mendoza is subject to a $40\%$ income tax, for both ordinary income and gains$/$losses associated with disposal of machinery, and that all cash flows occur at the end of the year, except for the initial investment. Assume that straight$-$line depreciation is used for tax purposes and that any tax associated with the disposal of machinery occurs at the same time as the related transaction.

Required:

$1.$ Determine relevant cash flows $($after$-$tax$)$ at the time of purchase of the new machine $($i$.$e$.,$ time $0$: January $1,2022).$

$2.$ Determine the relevant $($after$-$tax$)$ cash inflow each year of project operation $($i$.$e$.,$ at the end of each of years $1$ through $5).$

$3.$ Determine the relevant $($after$-$tax$)$ cash inflow at the end of the project's life $($i$.$e$.,$ at the project's disposal time, December $31,2026).$

$5.$ Determine the undiscounted net cash flow $($after tax$)$ for the new machine and determine whether, on this basis, the old machine should be replaced.