ojett appiaisai- Replacement AVC Corp has a machine which was purchased 10 years ago at a cost of $7, 500 with expected life of 15 years at the time it was of zero. The machine has been depreciated with straight line method. with a salvage value is considering a purchase of new machine to replace the old one. The cost of the new machine will be $12,000 ( annual operating costs from $8,000 before tax profits to rise by $3,500 (8 machine is expected to be 5 years and a salvage value of $2,000. shipping and installation) will cut This rduction in cost will cause 500). The useful life for the new The old machine current market value is $1,000. Net requirements will increase by $1,000 if the old machine is one. The new machine falls into the 3-year MACRS class. capital with the new Because the risk associated with the new machine is considered average, the project's required rate of return is 15%. Should the replacement be marginal tax rate is 40% The MACRS 3-year depreciation: 2011 2012 2013 2014 33% 45% 15% 796 Class work : Replacement Project Analysis 2010 2011 2012 2013 2014 2015 Initial Investment Outlay Cost of new asset Change in net working capital Net cash flow/sale of old asset Initial Investment Incremental Operating CF Operating costs Depreciation Earnings before taxes (EBT) Taxes (40%) Net Income Add back depreciation Incremental operating CF Terminal Cash Flow Return of net working capital Net salvage value of new asset Terminal Cash Flow Annual Net Cash Flow Total net cash flow each year