WRL Company operates a snack food center at the Hartsfield Airport. On January 1, 2003, WRL purchased a special cookie-cutting machine, which has been used for three years. It is January 1, 2006 and WRL is considering whether it should purchase a new, more-efficient cookie-cutting machine. WRL has two options: (1) continue using the old machine or (2) sell the old machine and purchase a new machine. The seller of the new machine isnt offering a trade-in. The following information has been obtained:

	Old Machine	New Machine
Initial Purchase cost of machines	$80,000	$120,000
Useful life from acquisition date (years)	7	4
Terminal disposal value at the end of useful life on Dec. 31, 2009, assumed for depreciation purposes	$10,000	$20,000
Expected annual cash operating costs:
Variable cost per cookie	$0.20	$0.14
Total fixed costs	$15,000	$14,000
Depreciation method for tax purposes	Straight line	Straight line
Estimated disposal value of machines:
January 1, 2006	$40,000	$120,000
December 31, 2009	$7,000	$20,000
Expected number of cookies made and sold each year	300,000	300,000

WRL is subject to a 40% income tax rate. Assume that any gain or loss on the sale of machines is treated as an ordinary tax item and will affect the taxes paid by WRL in the year in which it occurs. WRLs after-tax required rate of return is 16%. Assume all cash flows occur at year-end except for initial investment amounts.

You have been asked whether WRL should buy the new machine. To help in your analysis, calculate the following:

One-time after-tax cash effect of disposing of the old machine

Annual recurring after-tax cash operating savings from using the new machine (variable and fixed)

Cash tax savings due to the differences in annual depreciation of the old machine and the new machine

Difference in after-tax cash flow from terminal value disposal of new machine and old machine.