eInitial Cost Savings Tax Rate Expected Salvage of New Machine Salvage of Old Machine w/o New Salvage of Old Machine Now (w/ New) Discount Rate 1 Year 2 Old Machine Depreciation Old Machine Book Value 14 s New Machine MACRS Depreciation Schedule 37 Depreciation Expense 18 Book Value 19 20 Year 21 Change in Depreciation Expense 22 EBIT 23 Taxes 24 Operating Cash Flow 25 Net Income 26 Before Tax Salvage Value 27 Taxes on Salvage 28 After Tax Salvage Value 29 Initial Investment 30 31 Net Capital Spending 32 Changes in NWC 34 Cash Flow from Assets 36 Present Value of Cash Flow from Assets 0 0 Original Machine Initial cost=100,000 Depreciation=9,000 Purchased 5 years ago Book Value = 55,000 Salvage today = 65,000 Salvage in 5 years = 10,000 1 1 2 2 New Machine Initial cost 150,000 5-year life Salvage in 5 years = 0 Cost savings = 50,000 per year 3 3 3-year MACRS depreciation Required return = 10% Tax rate= 40% 4 5 5