Suppose you need to decide whether to keep a machine or replace it with a new one:
Old machine: Old machine can operate for 5 years with revenue and operating cost of $280,000 and $200,000 per year (from year 1 to year 5).
New machine: Replacing old machine with new one that requires capital cost of $600,000 in year zero (zero salvage value for old machine).
Capital cost is depreciable from year 0 to year 7 (over eight years) based on MACRS 7-year life depreciation with the half year convention (table A-1 at IRS).
New machine can produce income of $350,000 at lower operating cost of $160,000 per year for 7 years (from year 1 to year 7). New machine will have zero salvage value at the end of year 7. Consider income tax of 35% and minimum rate of return 8%.
Construct incremental analysis and conclude which alternative is more economically satisfactory? Please show your work.