Industrial Hooks plc is deciding when to replace its old machine.

The machine’s current salvage value is £3 million. Its current book value is £4 million. If not sold, the old machine will require maintenance costs of £300,000 at the end of the year for the next 5 years. Depreciation on the old machine is calculated using 20 per cent reducing balances. At the end of 5 years, it will have a salvage value of £100,000. A replacement machine costs £5 million now and requires maintenance costs of £100,000 at the end of each year during its economic life of 5 years. At the end of the 5 years, the new machine will have a salvage value of £1,000,000. It will be depreciated by the reducing balance method (20 per cent). In 5 years a replacement machine will cost £6,000,000. Industrial Hooks will need to purchase this machine regardless of what choice it makes today. The corporate tax rate is 24 per cent and the appropriate discount rate is 12 per cent. The company is assumed to earn sufficient revenues to generate tax shields from depreciation. Should Industrial Hooks replace the old machine now or at the end of 5 years?