Question: Suppose we are thinking about replacing an old computer with a new one. The old one cost us $309,600; the new one will cost $627,800.

Suppose we are thinking about replacing an old computer with a new one. The old one cost us $309,600; the new one will cost $627,800. The new machine will be depreciated straight-line to zero over its 5-year life. It will probably be worth about $116,100 after five years. The old computer is being depreciated at a rate of $103,200 per year. It will be completely written off in three years. If we don't replace it now, we will have to replace it in two years. We can sell it now for $163,400; in two years, it will probably be worth $68,800. The new machine will save us $111,800 per year in operating costs. The tax rate is 39 percent and the discount rate is 10 percent. Suppose we consider only whether we should replace the old computer now without worrying about what's going to happen in two years. Should we replace it or not? Hint: Consider the net change in the firm's aftertax cash flows if we do the replacement. The NPV is $________

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