Suppose that your firm is considering replacing the current hydraulic lift system with a new one. The old system has a book value of $50,000 and a remaining life of 10 years and can be sold at a price of $10,000 after capital gains taxes, right now.

The old lift system would be replaced with a new one that costs $200,000 and has a depreciable life of 10 years. Its annual operating costs are $20,000 lower than with the old machine.

Assume straight line depreciation for both the old and the new machines, a 35% tax rate and no salvage value on either machine in 10 years, and a cost of capital of 8% for the firm.

Evaluate whether or not the firm should replace the old hydraulic lift system with a new one.

Show your work, and explain what you conclusion is and why.