Last year a company purchased and installed a new X-Smasher. The X-Smasher cost $588,000 and had a "useful life" of 6 years.

Recently the firm's CEO became aware of a new technology that promised many advantages over the X-Smasher. He asked his CPA to do a financial analysis to determine if a new XL-Smasher could be an economically viable replacement for a X-Smasher that was only one year old.

The CPA determined that the new technology could be purchased for $750,000 today and would have a useful life of 5 years before it would likely become technologically obsolete and be essentially worthless. For depreciation purposes the company uses the straight line method.

With this information the CPA estimated that the new technology will produce EBITDA (earnings before interest, taxes, depreciation and amortization) of $365,000 per year for the next 5 years.

The current machine is expected to produce EBITDA of $265,000 per year. The current machine is being depreciated on a straight line basis over a useful life of 6 years after which it will have no salvage value; so the depreciation expense for the current machine (X-Smasher) is $98,000 per year.

All other expenses of the two machines are identical.

The market value of the current machine is $340,000. Your company's tax rate is 21% and the cost of capital is 12%.

Calculate the NPV of the replacement decision and decide whether the XL-Smasher should be bought.

NOTE: DO NOT make any assumptions regarding the tax treatment for the gain or loss on the disposal the X-Smasher