You are now in your second year of working as a financial analyst for HOHOHO Co and are trying to help the CEO, Nick Klaus, determine if the company should replace its existing production equipment, which is used to make toys and due to advancements in technology is headed toward obsolescence. Given the following information:

Original Production Equipment	New Production Equipment
Initial cost when purchased	$1,250,000	$2,500,000
Purchased date	3 years ago	Today
CCA Rate	20%	20%
Salvage today	$105,000	-
Salvage in 5 years	$25,000	$155,000
Estimated annual cost savings	-	$98,800
Useful life remaining	5 years	5 years

What is your recommendation to Nick Klaus? Provide all necessary calculations. You must show your work to get full marks.

Assume the following: Required return = 12%, Tax rate = 35%

Show all work