Rework Problem 12.18, assuming the following additional information:

• The current book value of the old machine is $4,000, and the annual depreciation charge is $800 if the firm decides to keep the old machine for the additional five years.
• The new asset is classified as a seven-year MACRS property.
• The company’s marginal tax rate is 40%, and the firm uses an after-tax MARR of 10%.

Data From Problem 12.18

Green leaf Company is considering the purchase of a new set of air-electric quill units to replace an obsolete machine. The current machine has a market value of zero; however, it is in good working order, and it will last physically for at least an additional five years. The new quill units will perform the operation with so much more efficiency that the firm’s engineers estimate that labor, material, and other direct costs will be reduced by $3,000 a year if the units are installed. The new set of quill units costs $10,000 delivered and installed, and its economic life is estimated to be five years with zero salvage value. The firm’s MARR is 10%.
(a) What is the investment required to keep the old machine?
(b) Compute the cash flow to use in the analysis of each option.
(c) If the firm uses the internal-rate-of-return criterion, would the analysis indicate that the firm should buy the new machine?