Otter must decide whether to replace a 10 year-old packing machine with a new one that costs $153,800. Replacing the old machine will increase net operating income(excluding depreciation) from $70,000 to $110,000 and it will decrease net working capital by $18,000. The new machine falls into MACRS 5-year class. If the new machine is purchased, it will be sold in 6 years for $25,000, whereas, if the old machine is kept, it will have no salvage value in 6 years. The old machine has a current market value of $10,860 and although its current book value is $8,000, in one year the old machine's book value will be zero ($0). There is a tax cost of $1144 on disposal of the old machine. The firm's marginal tax rate is 40% and its required rate of return is 12%. Should the new packing machine be purchased? Explain.

Depreciation:

New Old

30,760 8000 yr 1

49,216 0 yr 2

29,222 0 yr 3

18,456 0 yr 4

16,918 0 yr 5

9,228 0 yr 6