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 $53000 , 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 $75100 and requires a $4300 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 $54400 without incurring any removal or cleanup costs. The firm is subject to a tax rate of 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: 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.

X Data Table (Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.) New machine Old machine Expenses (excluding depreciation and interest) $720,900 Expenses (excluding depreciation and interest) Year Revenue Revenue $750,700 $674,200 $660,300 1 2 750,700 720,900 676,200 660,300 720,900 720,900 660,300 660,300 3 750,700 750,700 680,200 678,200 4 5 750,700 720,900 674,200 660,300 Print Done . X Data Table (Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.) Rounded Depreciation Percentages by Recovery Year Using MACRS for First Four Property Classes Percentage by recovery year* 3 years 5 years 7 years 10 years Recovery year 1 33% 20% 14% 10% 2 32% 18% 45% 25% 3 15% 19% 18% 14% 4 7% 12% 12% 12% 12% 5 9% 9% 6 5% 9% 8% 7 9% 7% 8 4% 6% 6% 9 10 6% 4% 11 100% Totals 100% 100% 100% *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 Print Done