Your company makes and sells shaving cream. You're thinking of replacing one of your packaging machines. Both the new and the old machine would last another $5$ years. Your annual sales will remain constant at $$43,000.$

The old machine could be sold for $$5,000$ today or $$2,000$ in $5$ years, after taxes. The annual cost of running the machine is $$30,000$ and its annual depreciation expense is $$2,000.$

The new machine costs $$26,000$ today and could be sold for $$5,200,$ after taxes, in $5$ years. The annual cost of running the machine is $$10,000$ and its annual depreciation expense is $$5,200.$ The new machine doesn't require any additional net working capital.

Your marginal tax rate is $34\%$ and the cost of capital for this project is $11\%.$ Your task is to find out if you should replace the machine.

What would be the cash flow from assets in each of the first $4$ years if you kept the old machine?

What would be the free cash flow in each of the first $4$ years if you bought the new machine?

What would be the cash flow from assets in year $5$ if you kept the old machine?

What would be the cash flow from assets in year $5$ if you bought the new machine?

What is the NPV of the replacement project?