Question: Solve not in Excel and provide all the formulas. The company is evaluating if the replacement of an old machine is economically feasible. You have

Solve not in Excel and provide all the formulas.

The company is evaluating if the replacement of an old machine is economically feasible. You have the following information:

New machine: purchase price is $8 million, economic life 10 years, annual EBITDA is $4.4 million, book value in 5 years is 0, while market value is 0.8 million. Old machine: book value today is $4 million while market value $2.8 million, remaining economic life is 10 years, annual EBITDA is $2.5 million, book value and market value in 5 years is 0. Company tax rate is 40% on both profits and capital gains. The cost of capital for the company is 14%. Find the incremental cash flows from replacement decision and evaluate if replacement is economically feasible based on NPV.

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