Suppose you need to decide whether to keep a machine or replace it with a new one:

Old machine: The old machine can operate for 5 years with operating cost of $120,000 per year.

New machine: Replacing the old machine with a new one requires a capital cost of $250,000 in year zero (assume that there is zero salvage value for old machine). The capital cost is depreciable from year 0 to year 5 (over six years) based on MACRS 5-year life depreciation with the half year convention (table A-1 at IRS). The new machine has a lower operating cost of $45,000 per year for 5 years (from year 1 to year 5).

Assume both machines produce similar good with similar value that yields similar revenue.

Consider income tax of 35% and a discount rate of 10% annually. In present discounted value terms, how much will you save by replacing the old machine with the new machine?

(Note: What you are being asked to do here is to conduct incremental NPV analysis on the new machine versus the old machine, NPV_{new machine - old machine}.)