The Darlington Equipment Company purchased a machine 5 years ago, prior to the TCJA, at a cost of $85,000. The machine had an expected life of 10 years at the time of purchase, and it is being depreciated by the straight-line method by $8,500 per year. If the machine is not replaced, it can be sold for $15,000 at the end of its useful life.

A new machine can be purchased for $170,000, including installation costs. During its 5-year life, it will reduce cash operating expenses by $40,000 per year. Sales are not expected to change. At the end of its useful life, the machine is estimated to be worthless.

The new machine is eligible for 100% bonus depreciation at the time of purchase.

The old machine can be sold today for $55,000. The firm’s tax rate is 25%. The appropriate WACC is 9%.

a. If the new machine is purchased, what is the amount of the initial cash flow at Year 0 after bonus depreciation is considered?

b. What are the incremental cash flows that will occur at the end of Years 1 through 5?

c. What is the NPV of this project? Should Darlington replace the old machine?

Explain.