Assume that the Mendoza Company is considering the replacement of a current machine, which has been used

Question:

Assume that the Mendoza Company is considering the replacement of a current machine, which has been used for the past three years in the operations of the business. The anticipated purchase date for this new machine is January 1, 2016. Mendoza will either keep the existing machine, or replace the existing machine with a new model. Pertinent facts regarding this decision are as follows:

Data

Assume further that Mendoza is subject to a 40% income tax, both for ordinary income and gains/losses associated
with the disposal of machinery, and that all cash flows occur at the end of the year, except for initial investment.
Also, assume that straight-line depreciation is used for tax purposes and that any tax associated with the disposal of
machinery occurs at the same time as the related transaction.
Required
1. Determine the relevant cash flow (after-tax) at time of purchase for the new machine (i.e., at time period 0, 01 January 2016)
2. Determine the relevant (after-tax) cash inflows each year of project operation (i.e., years 1 through 5, inclusive)
3. Determine the relevant (after-tax) cash inflow at the end of the project's life (i.e., at project disposal time, 31 December 2020)
4. Identify any irrelevant cost and revenue data associated with this asset-replacement decision
5. Determine the undiscounted net cash flow (after tax) for the new machine and indicate whether on this basis the new machine should be purchased.