It is being decided whether or not to replace an existing piece of equipment with a newer, more productive one that costs

$90 comma 00090,000

and has an estimated MV of

$23 comma 00023,000

at the end of its useful life of six years. Installation charges for the new equipment will amount to

$3 comma 0003,000;

this is not added to the capital investment but will be an expensed item during the first year

of operation. MACRS (GDS) depreciation (5-year property class) will be used. The new equipment will reduce direct costs (labor, maintenance, rework, etc.) by

$12 comma 00012,000

in the first year, and this amount is expected to increase by

$700700

each year thereafter during its six-year life. It is also known that the BV of the fully depreciated old machine is

$00

but that its present fair MV is

$16 comma 00016,000.

The MV of the old machine will be zero in six years. The effective income tax rate is

4545%.

a. Determine the prospective after-tax incremental cash flow associated with the new equipment if it is believed that the existing machine could perform satisfactorily for six more years.

b. Assume that the after-tax MARR is

1010%

per year. Based on the ERR method, should you replace the defender with the challenger? Assume

epsilonequals=MARR.

Fill in the table below.

Incremental Cash Flows (Challenger-Defender) EOY