Consider the case of LoRusso Company:

The managers of LoRusso Company are considering replacing an existing piece of equipment, and have collected the following information:

$$ The new piece of equipment will have a cost of $$1,800,000,$ and it will be depreciated on a straight$-$line basis over a period of five years.

$$ The old machine is also being depreciated on a straight$-$line basis. It has a book value of $$200,000($at year $0)$ and three more years of depreciation left $($$$50,000$ per year$).$

$$ The new equipment will have a salvage value of $$0$ at the end of the project's life $($year $5).$ The old machine has a current salvage value $($at year $0)$ of $$300,000.$

$$ Replacing the old machine will require an investment in net working capital $($NWC$)$ of $$30,000$ that will be recovered at the end of the project's life $($year $5).$

$$ The new machine is more efficient, so the incremental increase in operating income before taxes will increase by a total of $$300,000$ in each of the next five years $($years $15).($Hint: This value represents the difference between the revenues and operating costs $($including depreciation expense$)$ generated using the new equipment and that earned using the old equipment.$)$

$$ The project's required rate of return is $8\%.$

$$ The company's annual tax rate is $35\%.$