Question 2 [25 marks] You are considering replacing an old machine which was purchased 2 years ago at $120,000. The old machine is still working and has three more years of useful life. If you sell the old machine today, you can sell at $40,000. The new machine costs you $150,000 and has a life of three years. The new machine is more efficient; therefore, the operating expenses (excluding depreciation) will be reduced by $75,000 per year. Replacing old with new one reduces the inventory level by $10,000. The old machine will be worthless after three years (from now) whereas the new machine could be scrapped at $15,000. Use straight-line method for deprecation. The tax rate is 40% and required rate of return is 10%. a. Estimate the incremental Initial cash flow. [6 marks] b. Estimate the incremental Operating Cashflows from Year 1 to Year 3. [7 marks] c. Estimate the incremental terminal cash flow and the total incremental cash flow for final year. [5 marks] d. Compute the NPV of the incremental cash flows and write your recommendation. [ 6+1 marks]