Suppose you need to decide whether to keep a machine or replace it with a new one:

Old machine: Old machine can operate for 5 years with operating cost of $120,000 per year.

New machine: Replacing old machine with new one requires capital cost of $250,000 in year zero (zero salvage value for old machine). Capital cost is depreciable from year 0 to year 5 (over six years) based on MACRS 5-year life depreciation with the half year convention (table A-1 at IRS (Links to an external site.)). New machine can produce with lower operating cost of $45,000 per year for 5 years (from year 1 to year 5).

Assume both machines produce similar good with similar value that yields similar revenue.

Consider income tax of 38% and minimum rate of return 16%. Construct incremental analysis and conclude which alternative is more economically satisfactory? Please show your work.

ANSWER ON EXCEL

Table A-1. 3., 5., 7., 10-, 15-, and 20-Year Property Half-Year Convention Depreciation rate for recovery period 3-year 5-year 7-year 10-year 15-year 33.33% 20.00% 14.29% 10.00% 5.00% 44.45 32.00 24.49 18.00 9.50 14.81 19.20 17.49 14.40 8.55 7.41 11.52 12.49 11.52 7.70 11.52 8.93 9.22 6.93 20-year 3.750% 7.219 6.677 6.177 5.713 Ovo nown 5.76 8.92 8.93 4.46 6.23 5.90 7.37 6.55 6.55 6.56 6.55 5.90 5.285 4.888 4.522 4.462 4.461 5.91 5.90 3.28 5.91 5.90 5.91 5.90 5.91 4.462 4.461 4.462 4.461 4.462 2.95 8o a 4.461 4.462 4.461 4.462 4.461 2.231