Central Laundry and Cleaners is considering replacing an existing piece of machinery with a more sophisticated machine. The old machine was purchased 3 years ago at a cost of

$ 52 comma 400$52,400,

and this amount was being depreciated under MACRS using a 5-year recovery period. The machine has 5 years of usable life remaining. The new machine that is being considered costs

$ 75 comma 300$75,300

and requires

$ 3 comma 500$3,500

in installation costs. The new machine would be depreciated under MACRS using a 5-year recovery period. The firm can currently sell the old machine for

$ 55 comma 900$55,900

without incurring any removal or cleanup costs. The firm is subject to a tax rate of

40 %40%.

The revenues and expenses (excluding depreciation and interest) associated with the new and the old machines for the next 5 years are

given in the table

New machine			Old machine
Year	Revenue	Expenses (excluding depreciation and interest)		Revenue		Expenses (excluding depreciation and interest)
1	$ 749 comma 400$749,400	$ 719 comma 800$719,800		$ 674 comma 500$674,500		$ 660 comma 700$660,700
2	749 comma 400749,400	719 comma 800719,800		676 comma 500676,500		660 comma 700660,700
3	749 comma 400749,400	719 comma 800719,800		680 comma 500680,500		660 comma 700660,700
4	749 comma 400749,400	719 comma 800719,800		678 comma 500678,500		660 comma 700660,700
5	749 comma 400749,400	719 comma 800719,800		674 comma 500674,500		660 comma 700

Rounded Depreciation Percentages by Recovery Year Using MACRS for First Four Property Classes
	Percentage by recovery year*
Recovery year	3 years	5 years	7 years	10 years
1	3333%	2020%	1414%	1010%
2	4545%	3232%	2525%	1818%
3	1515%	1919%	1818%	1414%
4	77%	1212%	1212%	1212%
5		1212%	99%	99%
6		55%	99%	88%
7			99%	77%
8			44%	66%
9				66%
10				66%
11				44%
Totals	100100%	100100%	100100%	100100%
*These percentages have been rounded to the nearest whole percent to simplify calculations while retaining realism. To calculate the actual depreciation for tax purposes, be sure to apply the actual unrounded percentages or directly apply double-declining balance (200%) depreciation using the half-year convention.

. (Table contains the applicable MACRS depreciation percentages.) Note:The new machine will have no terminal value at the end of 5 years.

a. Calculate the initial investment associated with replacement of the old machine by the new one.

b. Determine the incremental operating cash inflows associated with the proposed replacement. (Note: Be sure to consider the depreciation in year 6.)

c. Depict on a time line the relevant cash flows found in parts (a) and (b) associated with the proposed replacement decision.