Your company makes and sells shaving cream. You're thinking of replacing one of your packaging machines. Both the new and the old machine would last another 5 years. Your annual sales will remain constant at $47,000.

The old machine could be sold for $5,000 today or $2,000 in 5 years, after taxes. The annual cost of running the machine is $20,000 and its annual depreciation expense is $2,000.

The new machine costs $34,000 today and could be sold for $6,800, after taxes, in 5 years. The annual cost of running the machine is $10,000 and its annual depreciation expense is $6,800. The new machine doesn't require any additional net operating working capital.

Your marginal tax rate is 34% and your cost of capital is 11%. Your task is to find out if you should replace the machine.

1. What would be the incremental free cash flow in year 0 if you replaced the machine?

2. What would be the free cash flow in each of the first 4 years if you kept the old machine?

3. What would be the free cash flow in each of the first 4 years if you bought the new machine?

4. What would be the free cash flow in year 5 if you kept the old machine?

5. What would be the free cash flow in year 5 if you bought the new machine?

6. What is the NPV of the replacement project?