You recently beganworking for Orange Fizz Companyandmanagement is contemplating the replacement of itsexisting,three-year oldbottling machines that originally cost $6,760,000 withnewer and more efficient ones. The old, existingmachines,wereplaced on the MACRS five-year classlife depreciation schedule(assuming half-year convention)three years ago. Total operating costs for the old bottling machines are$2,640,000 per year and Orange Fizz will bottle 24million bottles per year each year for the next seven years. The firm expects to realize a $440,000 return from salvaging the old machinesin 7 years; however, the existing machinemay be soldnow to another firm in the industry for $1,060,000.If Orange Fizzretainsthe old machines, theywould be operationalfor the next 7-years.

The new machines, if purchased, would cost $7,240,000 and would be placed on a MACRS five-year class life depreciationandwill be kept in operation for the next 7 years. Thenewmachinesare expected to have asalvage value of $748,000 in seven years. Totalannual savingsin operating costs of$1,768,000will be realized ifthenew bottlingmachines areinstalled. The company is inthe 40%incometax bracketand it has a10%WACC.

Determine if thereplacementshould occur by estimating the replacement project's NPV and IRR.Use a relative(incremental)cash flow analysis similar to what we did in class and in your text.