Micah Corporation is trying to determine the initial investment required to replace an old machine with a new one. The new machine costs $61000. It will be depreciated under MACRS, using a 5-year recovery period. The 5-year MACRS depreciation rates are:

Year	1	2	3	4	5	6
Depreciation	20%	32%	19%	12%	12%	5%

The old machine was purchased 3 years ago at a cost of $57000 and was being depreciated under MACRS, using a 5-year recovery period. The firm can sell the old machine for $30000. The firm expects that a $19700 increase in current assets and an $2700 increase in current liabilities will accompany the replacement. The firms tax rate is 21%.

The new machine and the old machine are associated with the following EBITDA (earnings before interest, taxes, depreciation and amortization) over the 5-year life of the project:

Year	1	2	3	4	5
New machines EBITDA	104000	104000	104000	104000	104000
Old machines EBITDA	87000	87000	87000	87000	87000

Assume that the firm expects to liquidate the new machine at the end of its 5-year usable life, to net $20000 after paying removal and cleanup costs. Had the new machine not replaced the old machine, the old machine would have been liquidated after 5 years to net $6000. The firm expects to recover its net working capital investment upon termination of the project.

If the corporations capital structure is 50% debt and the rest of capital is equity, and the corporation will continue this capital structure to fund the investment on the new machine. Its cost of debt is 6.33% and cost of equity is 15%. What is the NPV if Micah decides to do the replacement (when calculating WACC, please keep two decimal places for the percentage such as 15.38%)?

Hints

1. You may need the following equations:

FCF=EBIT(1-T)+DP-net CAPX-NWC

WACC=wdrd(1-T)+w_sr_s

After-tax salvage value=MV-(MV-BV) T

Excel function of NPV

2. It is a replacement decision and you need to consider the effect of the new machine relative to that of the old one.