1. Star Printing Inc. is considering replacing some of its old printing machines with new, more modern machines.Star has compiled the following information:

• The new equipment cost $20 million and would be depreciated over 10 years to a book value of $1 million.
• The old equipment currently in place has a net book value of $1 million and if kept would continue to depreciate to a net book value of zero over the next 3 years.
• Star estimates it could sell the old equipment for $1 million.
• Star estimates that the new equipment world be worth $800,000 in ten years and that the cost of removing the equipment at that time would be $100,000.
• The installation of the new equipment is expected to be $2 million, with $1.5 million being capitalized over 10 years and $500,000 being expensed immediately.
• To run the new equipment, Star estimates that $60,000 in working capital will be required.
• The new equipment is expected to generate a pretax savings (less worker, maintenance, etc) of $4 million per year.
• Other information:
• No investment tax credit
• Star uses Straight-Line Depreciation
• Effective tax rate = .40
• Stars Cost of Capital = k_c = .12
• Question: Should Stars replace its printing machines?