A firm is trying to determine whether to replace an existing asset. The proposed asset has a purchase

price of $50,000 and has installation costs of $3,000. The asset will be depreciated over its five year life

using the straight-line method. The new asset is expected to increase sales by $17,000 and non-

depreciation expenses by $2,000 annually over the life of the asset. Due to the increase in sales, the firm

expects an increase in working capital during the assets life of $1,500, and the firm expects to be able to

sell the asset for $6,000 at the end of its life. The existing asset was originally purchased three years ago

for $25,000, has a remaining life of five years, and is being depreciated using the straight-line method.

The expected salvage value at the end of the assets life (i.e., five years from now) is $5,000; however,

the current sale price of the existing asset is $20,000, and its current book value is $15,625. The firms

marginal tax rate is 34 percent and its required rate of return is 12 percent.

a) The net initial outlay if the new asset is purchased is:

b) The net incremental free cash flows from this new investment are:

c) The after-tax terminal cash flow (at the end of year 5) is:

d) The NPV for this replacement decision is: