Question 2 Machine B may be purchased for $180. It has a three-year life and produces cash flows of C1 = $165, C2 = $182.5, and C3 = $200. Machine A was purchased two years ago at a cost of $300 and produced cash flows of $100 and $120, respectively, in its first two years of operation. There are three years remaining in its life and over the next three years Machine A is expected to produce cash flows of C1 = $135, C2 = $100, and C3 = $145. Neither machine has any salvage value. The opportunity cost of capital is 10%.

Should the company replace Machine A with Machine B before Machine A wears out? If so, when should Machine A be replaced and why?