Problem:
The Taylor Corporation is using a machine that originally cost $88,000. The machine is being depreciated by the straight-line method over 8 years ($11,000 per year) and has 4 years of depreciation remaining. The machine has a book value of $44,000 and a current market value of $40,000. Jacqueline Elliott, the Chief Financial Officer of Taylor, is considering replacing this machine with a newer model costing $75,000. The new machine will save $5,000 in after-tax earnings each year for the next six years. The new machine is in the 5-year MACRS category. Taylor Corporation is in the 34% tax bracket and has a 10 percent cost of capital.
Problem:
Question 1: Calculate the cash inflows from the sale of the old machine.
Question 2: Calculate the net cost of the new machine.
Question 3: Calculate the incremental depreciation on the new versus the old machine.
Question 4: Determine the net present value of the new machine. Should they purchase the new machine?
Note: Provide support for rationale.