1. The Bigbee Bottling Company is contemplating the replacement of one of its bottling machines with a newer and more efficient one. The old machine has a book value of $600,000 and a remaining useful life of 5 years. The firm does not expect to realize any return from scrapping the old machine in 5 years, but it can sell it now to another firm in the industry for $265,000. The old machine is being depreciated toward a zero salvage value, or by $120,000 per year, using the straight-line method.

The new machine has a purchase price of $1,175,000, and estimated useful life and MACRS class life of 5 years, and an estimated salvage value of $145,000. It is expected to economize on electric power usage, labor, and repair costs, as well as to reduce the number of defective bottles. In total, an annual savings of $255,000 will be realized if the new machine is installed. The Companys marginal tax rate is 35 percent and it has a 12 percent cost of capital.

1. What is the after-tax salvage value of the new machine in Year 5?
2. What is the terminal year cash flow (CF₅)
3. What is the NPV of the new machine?