The Company is evaluating the purchase of a new machine which would replace one of its existing machines.

The Existing machine was originally purchased then years ago at a cost of $75,000 and has been depreciated to a book value of zero. If the company does not replace the existing machine, it anticipates being able to use the existing machine for 6 more years at which time its salvage value would be zero. The firm's use of its existing machine is expected to generate revenue of $200,000 per year and cash operating expenses of $140,000 per year.

If the company acquires the new machine it will be able to bid on larger projects that require the new machine's capabilities. The firm can sell its existing machine for $3,000 today. The new machine will cost the firm $120,000 which will be depreciated over 6 years using the straight-line method. The company anticipates the new machine will be sold for $6,000 at the end of its six year economic life. The firm's use of the new machine is expected to increase both annual revenues and cash operating expenses to $280,000 and $175,000 respectively.

The marginal tax rate is 40%. The project cost of capital is 15%