Three year ago your firm purchased some industrial machinery used in manufacturing for $110,000. You have recently become aware that a new machine is available that provides for more efficiencies that you can purchase for $150,000. The new machine is expected to have a useful life of 7 years and will require an immediate increase in net working capital of $5,000 (recovered at the end of 7 years). If acquired, this new machine will be fully depreciated straight-line over its useful life. Further, you expect this new machine to have a salvage (sale price) value $20,000.

You expect the new machine will lead to a reduction in operating costs (excluding depreciation) of $20,000 per year for the next 7-years. The current machine is being fully depreciated on a straight-line basis over a useful life of 10-years. The market value today of the current machine is $60,000. Your firms tax rate is 30%, and the cost of capital for the firm is (required return) 10%.

Should your firm replace the current machine?