The firm is considering replacing an old piece of machinery. The machine has four years of depreciation in the amount of $25,000 per year remaining on the books (Total Bvas100,000 at t = 0). The machine can be sold today only for $80,000. It is perfectly functional and could be used for four more years. A new machine perform the same task) will cost $450.000, an additional %$50,000 to be delivered and installed. and is more efficient, decreasing net operating working capital by $25.000. The new machine has an estimated life of four years, and will be depreciated fully with the straight line method for four years. At the end of four years. the new machine be for $200,000. Since the new machine is more than the old one. It will save the firm $350,000 each year. The firm is in the 40% tax bracket, and its WACC is 6%. Should they replace the machine?
a) What is the after tax salvage value of the old machine at time t-o?
b) What is the total initial cash outflow, i.e. CF_o?
c) What is the depreciation for each year of the project?