The company purchased a machine used in manufacturing two years ago for $120 000. Now it appears that a new machine is available with more advanced features than current machinery. The company can buy that machine for $180 000 today. It will be fully depreciated on a straight-line basis over 10 years after which the book value is zero. However, it is still expected to have a modest market value, which is 10% of the current purchase price. You expect that the new machine will produce an EBITDA of $50 000 per year for the next 10 years while with the old machine, the EBITDA was only $30 000 per year. The current (old) machine is being depreciated on a straight-line basis over a useful life of 12 years, after which it doesnt have any value. All other expenses of the two machine are identical and can be therefore ignored. The market value today of the old machine (if sold) is $50 000. The company tax rate is 30% and the cost of capital is 10%.

Questions:

a) Identify the incremental cash flows relevant to the replacement decision (use excel)

b) Based on NPV, show if replacement of an older machine with a new one is economically profitable