USING EXCEL

The Erley Equipment Company purchased a machine 5 years ago at a cost of $100,000. The machine had an expected life of 10 years at the time of purchase, and an expected salvage value of $10,000 at the end of the 10 years. It is being depreciated by the straight line method toward a salvage value of $10,000, or by $9,000 per year. A new machine can be purchased for $150,000, including installation costs. During its 5-year life, it will reduce operating expenses by $50,000 per year. Sales are not expected to change. At the end of its useful life, the machine is estimated to be worthless. The machine will be depreciated as a MACRS 3-year class equipment. The old machine can be sold today for $65,000. The firms tax rate is 35%. The appropriate discount rate is 16%. Estimate the incremental Free Cash Flow to the Firm (FCF) expected from the replacement in each year. What is the NPV of this replacement? Should Erley replace the old machine?