The Cabbage Patch Company currently uses a printing press that was purchased 5 years ago. The machine has a life of 15 years and was purchased for $7500. The current book value of the machine is $5000. A new machine costing $12,000 can be purchased with a life of 10 years and will expand sales from $10,000 to $11,000 a year. Also labor cost would be reduced from $7,000 to $5,000. The new machine will have a salvage value of $2,000 at the end of 10 years. The old machine has a market value of $1000. Taxes are at a 40% rate and the firms cost of capital is 10%. The company will sell the new equipment at the end of its life for $2,000. The old equipment has a zero salvage value.

1. Use straight line depreciation to calculate the depreciation.

2. Calculate the net present value of the new machine