You are expected to use the incremental cash flow approach to calculate NPV of the replacement capital
•New Machine
–Initial cost = 150,000
–5-year life
–Salvage in 5 years = 0
–Cost savings = 50,000 per year
–3-year MACRS depreciation
•Required return = 10%
•Tax rate = 40%
•Original Machine
–Initial cost = 100,000
–Annual depreciation = 9,000
–Purchased 5 years ago
–Book Value = 55,000
–Salvage today = 65,000
–Salvage in 5 years = 10,000
•Remember that we are interested in incremental cash flows
•If we buy the new machine, then we will sell the old machine
•What are the cash flow consequences of selling the old machine today instead of in 5 years?