You are trying to decide whether to replace a machine on your production line. The new machine will cost $1 Million, but will be more efficient than the old machine, reducing costs by $500,000 per year. Your old machine is fully depreciated, but you could sell it for $50,000. You would depreciate the new machine over a 3 year life using MACRS, the new machine will not change your working capital needs. Your tax rate is 35%, and your cost capital is 9% (Note: the depreciation rare of 3 year life for MACRS: 33.33, 44.45, 14.81, 7.41)

A) What is the salvage value of the old machine?

B) What are are the incremental cash flows for the replacement? (Please construct a table to show the calculation)

C) Should you replace the machine?