Problem 4 completed with a calculator not in excel

The Dauten Toy Corporation currently uses an injection molding machine that was purchased 2 years ago. This machine is being depreciated on a straight line basis toward a $500 salvage value and it has 6 years of remaining life. Its current book value is $2,600, and it can be sold for $3,000 at this time.

Dauten is offered a replacement machine which has a cost of $8,000, an estimated useful life of 6 years, and an estimated salvage value of $800. This machine falls into the MACRS 5-year class. The replacement machine would permit an output expansion, so sales would rise by $1,000 per year; even so, the new machine's much greater efficiency would still cause operating expenses to decline by $1,500 per year. The new machine would require that inventories be increased by $2,000, but accounts payable would simultaneously increase by $500.

Dauten's marginal federal-plus-state tax rate is 40 percent, and its cost of capital is 15 percent. Should it replace the old machine?