TEI LLC, a manufacturer of ski apparel, is considering replacing an existing piece of equipment with a more sophisticated machine. The following information is given.

Facts
Existing Machine		Proposed Machine
Cost	$50,000	Cost	$65,000
Installed	2 years ago	Installation	$ 5,000
Depreciation	MACRS 3-year	Depreciation	MACRS 3-year
Current Market Value	$15,000
Useful Life	1 year remaining	Useful Life	3 years total

Earnings before Depreciation and Taxes
Existing Machine		Proposed Machine
Year	Amount	Year	Amount
1	$70,000	1	$85,000
2	$65,000	2	$85,000
3	$60,000	3	$85,000

The firm pays 40 percent taxes on ordinary income and capital gains. The existing machine is expected to have no market (salvage) value after three more years of use, but proper disposal will cost $5,000 before tax. Managers expect the new machine to have a market value of $20,000 after three years of use. There is no change in working capital required for the project.

Calculate the following for each machine:

Depreciation

All incremental after-tax cash flows (investment and operating)

The after-tax terminal value

The NPV and IRR if the companys WACC is 9.4%. Should they replace the old machine?