Please solve 11-1

-Test Problems (Solutions in Appendix) ST11-1 Determining relevant cash flows A machine curre ntly in use was originally purchased 2 years ago for $40,000. The machine is being depreciated under MACRS using a 5-year recovery period; it has 3 years of usable life remaining. The current can be sol machine d today to net $42,000 after removal and cleanup costs. A new machine, using a 3-year MACRS recovery period, can be purchased at a price of $140,000. It requires $10,000 to install and has a 3-year usable life. If the new machine is ac- quired inventory investment will increase by $25,000, and accounts payable will increase by $15,000. Earnings before depreciation, interest, and taxes are expected to be $70,000 for each of the next 3 years with the old machine and to be $120,000 in the first year and $1 3 years, the market value of the old machine will equal zero, but the new machine could be sold to net $35,000 before taxes. The firm is subject to a 40% tax rate. (Table 4.2 on page 112 contains the applicable MACRS depreciation percentages.) a. Determine the initial investment associated with the proposed replacement , the investment in accounts receivable will be expected to rise by $10,000, the 30,000 in the second and third years with the new machine. At the end of decision. b. Calculate the incremental operating cash flows for years 1 to 4 a with the proposed replacement. (Note: Only depreciation cash flows must be consid- ered in year 4.)