Redo Problem 14.4 with the following additional information.
• The current book value of the old machine is $50,000. The old machine is being depreciated toward a zero salvage value by means of conventional straight-line methods (or by $10,000 per year).
• The new machine will be depreciated under a seven-year MACRS class.
• The company's marginal tax rate is 40%, and the firm uses a 12% after-tax MARR.
In Problem 14.4
Air Links, a commuter airline company, is considering replacing one of its baggage-handling machines with a newer and more efficient one. The current book value of the old machine is $50,000, and it has a remaining useful life of five years. The salvage value expected from scrapping the old machine at the end of five years is zero, but the company can sell the machine now to another firm in the industry for $10,000. The new baggage-handling machine has a purchase price of $ 120,000 and an estimated useful life of seven years. It has an estimated salvage value of $30,000 and is expected to realize economic savings on electric power usage, labor, and repair costs and also to reduce the amount of damaged luggage. In total, an annual savings of $50,000 will be realized if the new machine is installed. The firm uses a 15% MARR. Using the opportunity cost approach,
(a) What is the initial cash outlay required for the new machine?
(b) What are the cash flows for the defender in years zero through five?
(c) Should the airline purchase the new machine?