Existing machine was purchased 2 years ago at a cost of $3,200.It is being depreciated straight line over its 8 year life.It can be sold now for $3,000 or used for 6 more years at which time it will be sold for an estimated $500.It provides revenue of $5,000 annually and cash operating costs of $2,000 annually.

A replacement machine can be purchased now for $7,800.It would be used for 6 years, and depreciated straight line.It will result in additional sales revenue of $1,500 annually, but because of its increased efficiency it would reduce cash operating costs by $600 per year.The new machine would require additional inventories of $700, and accounts receivable would increase by $300. Its expected salvage value in 6 years is $2,000.

The tax rate is 40% and the required rate of return is 13%.Should the old machine be replaced?

a. Calculate the incremental cash flow at time 0.

b. Calculate the incremental annual operating cash flows that result from the new machine.

c. Calculate the incremental terminal cash flow.

d. Show the incremental CFs in the table below.

YearCash Flow

0________

1________

2________

3________

4________

e. Calculate the NPV for this project.