You are expected to use the incremental cash flow approach to calculate NPV of the replacement capital

New Machine

Initial cost = 150,000

5-year life

Salvage in 5 years = 0

Cost savings = 50,000 per year

3-year MACRS depreciation

Required return = 10%

Tax rate = 40%

Original Machine

Initial cost = 100,000

Annual depreciation = 9,000

Purchased 5 years ago

Book Value = 55,000

Salvage today = 65,000

Salvage in 5 years = 10,000

Remember that we are interested in incremental cash flows

If we buy the new machine, then we will sell the old machine

What are the cash flow consequences of selling the old machine today instead of in 5 years?