$($B$9$c$)($Cash flows and NPV for a replacement decision$)$ Andrew Thompson Interests $($ATI$)$ is using a mechanical switching system that it bought five years ago for $$400,000.$ This mechanical system is being depreciated straight line to an estimated salvage value of zero over a $10-$year life. Thus, the annual depreciation charge is $$40,000$ and current book value is $$200,000.$ At the end of its life, the actual salvage value is expected to be $$25,000.$ If ATI sold this equipment today, it would fetch $$100,000.$

ATI is evaluating a new digital switching system that will cost $$500,000.$ The digital system is depreciated straight line to a zero salvage value over a five$-$year life. At the end of the five years, ATI expects to sell the system for $$150,000.$ The new digital system should have a favorable impact on operating cash flows, increasing revenues by $$100,000$ annually and decreasing cash operating expenses by $$50,000$ annually. The new equipment has no effect on the investment in working capital.

ATI is in the $40\%$ tax bracket and has a $12\%$ cost of capital. Consider each of the following questions assuming that ATI sells the old mechanical switching system and replaces it with the digital system.

What is the after$-$tax salvage value?

$$60,000$

$$90,000$

$$66,000$

$$75,000$