2. Adapted from CIMA Mahe Inc. is evaluating the possible investment in a new machine to replace the existing one. The existing machine generates an annual contribution of $30,000. The new machine is expected to increase this by 40%. The new machine will cost $25,000. It has an estimated useful life of four years and a residual value of $5,000 for tax purposes. The new machine qualifies for tax depreciation using the straight-line method. If the new machine were purchased, the existing machine would be sold immediately for $8,000. The existing machine has a written down value of $3,000 for tax purposes. Mahe Inc. is in a tax jurisdiction that assesses the company at a tax rate of 30%, with half of the tax being payable in the year that the profits is earned and half in the next year. The company has an after-tax cost of capital of 15%.

Should Mahe Inc. purchase the new machine? You may assume that Mahes revenue and expenses result in cash flows in the same year and cash flows occur at the end of the year.