Relevant cash flowsNo terminal valueCentral Laundry and Cleaners is considering replacing an existing piece of machinery with a more sophisticated machine. The old machine was purchased 3 years ago at a cost of $54,300, and this amount was being depreciated under MACRS using a 5-year recovery period. The machine has 5 years of usable life remaining. The new machine that is being considered costs $76,200 and requires $4,200 in installation costs. The new machine would be depreciated under MACRS using a 5-year recovery period. The firm can currently sell the old machine for $54,800 without incurring any removal or cleanup costs. The firm is subject to a tax rate of 40%.

The revenues and expenses (excluding depreciation andinterest) associated with the new and the old machines for the next 5 years aregiven in the table

	New machine			Old machine
Year	Revenue	Expenses (excluding depreciation and interest)		Revenue	Expenses (excluding depreciation and interest)
1	$749,400	$719,100		$673,400	$659,800
2	749,400	719,100		675,400	659,800
3	749,400	719,100		679,400	659,800
4	749,400	719,100		677,400	659,800
5	749,400	719,100		673,400	659,800

. (Table

Percentage by recovery year*
Recovery year	3 years	5 years	7 years	10 years
1	33%	20%	14%	10%
2	45%	32%	25%	18%
3	15%	19%	18%	14%
4	7%	12%	12%	12%
5		12%	9%	9%
6		5%	9%	8%
7			9%	7%
8			4%	6%
9				6%
10				6%
11				4%
Totals	100%	100%	100%	100%

contains the applicable MACRS depreciation percentages.) Note: The new machine will have no terminal value at the end of 5 years.

a. Calculate the initial investment associated with replacement of the old machine by the new one.

b. Determine the incremental operating cash inflows associated with the proposed replacement. (Note: Be sure to consider the depreciation in year 6.)

c. Depict on a time line the relevant cash flows found in parts(a) and (b) associated with the proposed replacement decision.

a. Calculate the initial investment associated with replacement of the old machine by the new one.

Calculate the initial investment below:(Round to the nearest dollar.)

Cost of new asset	$	76,200
Installation costs		4,200
Total cost of new asset			$	80,400
Proceeds from sale of old asset	$	(54,800)
Tax on sale of old asset		15,621
Total proceeds, sale of old asset			$	(39,179)
Initial investment			$	41,221

b. Determine the incremental operating cash inflows associated with the proposed replacement. (Note: Be sure to consider the depreciation in year 6.)

Calculate the cash flows with the old machine below:(Round to the nearest dollar.)

Year	1
Profit before depreciation and taxes	$
Depreciation	$
Net profit before taxes	$
Taxes	$
Net profit after taxes	$
Operating cash inflows	$