Q6

A company plans to replace an old machine with a new one. The old machine has a book value of $50,000 and a remaining life of 3 years with no salvage value. The new machine costs $150,000 and will have a 3-year life with no salvage value. The new machine is expected to reduce operating costs by $40,000 per year. The company’s tax rate is 35% and it uses straight-line depreciation. The cost of capital is 10%. The present value factors for 10% are:

Year	PV Factor
1	0.909
2	0.826
3	0.751

Requirements:

1. Calculate the annual depreciation expense for the new machine.
2. Determine the annual after-tax savings due to the new machine.
3. Compute the NPV of the replacement project.
4. Calculate the IRR of the replacement project.
5. Should the company replace the old machine? Provide reasons for your answer.