Suppose a company is thinking about replacing an old machine with a new one. The company purchased the old machine two years ago for $1,300,000. The machine was expected to last for five years and used straight-line depreciation method to zero salvage value. The company can sell the old machine for $420,000, and buys a new machine for $1,560,000. The new machine will be depreciated straight-line to zero over its five-year life. The new machine will save the company $290,000 per year in operating costs. These cost savings are equivalent to increased earnings before depreciation and taxes. The company has a 38% tax rate and a 12% discount rate.

Sale of Old Machine			420,000
Book Value of Old Machine
Tax Bill or Tax Credit
Total Cash Flow from Sale of Old Machine
Net Present Value for Using Old Machine
Equivalent Annual Cost for Using Old Machine
Net Present Value for Using New Machine
Equivalent Annual Cost for Using New Machine
Should the company get the new machine?