Imagine that you are the owner of a chain fitness club, ZKA Ltd. The treadmills that were purchased for the gyms are getting quite old, and many customers are complaining about them being noisy. The finance department has gone through the outgoing payments and reported that they cost 118,000; buying new ones for all the branches in the country will cost 141,000. Based on experience, we know that the new treadmills will last for five years, and we will be able to sell them at a second-hand market for 27,000. The depreciation rate for the existing treadmills is 23,000 a year, and the finance manager will write them off in three years. Its important to note that if you dont replace them with new ones now, you will have to replace them in two years. There is a buyer for the old treadmills now who is offering 38,000. If you dont sell them right now and instead keep them for another two years, you would be able to sell them for 10,000. Considering the maintenance cost of the existing treadmills, you will be able to save 26,000 per year (cost of operation) by buying new ones. More information: New treadmills operating cash flow (for 5 years) 27,000 Old treadmills operating cash flow 8,900 The initial cost of old machine using after tax salvage value 68,500 Tax rate 7% Discount rate 2% a) Use your knowledge to explain the best decision. Is it better to substitute the old treadmills with the new ones? b) What would the cash flow be, assuming we are not concerned with whats going to happen in two years and we are just wondering if we should replace the treadmills or not