You are considering replacing an old machine whichwas purchased 2 years ago at $95000. The old machine is still working and has three more years of useful life; and will be depreciated fully by then. If you sell the old machine today, you can sell at $58000. The new machine costs you $13500 and has a life of three years. The new machine is more efficient; therefore the operating expenses (excluding depreciation) will be reduced by $60000 per year. Replacing old with new one reduces the inventory level by $12000. The old machine will be worthless after three years from now whereas the new machine could be scrapped at $12000. Use straight-line method for deprecation. The tax rate is 39% and required rate of return is 10%

a.Estimate the Incremental Initial cash flow.

b. Estimate the Incremental Operating Cashflows from Year 1 to Year 3.

c.Estimate the Final Year increetcash ows incuding the incremental terminal cash flows.

d. Compute the NPV of the incremental cash flows and write your recommendation.