The Zeus Company has decided to replace its old hat making machine as its capacity is too low to meet anticipated demand. This machine was purchased six years ago. It has an accounting value of $15,000, net of accumulated depreciation, but a market value of only $5,000.

There are several possible replacements and you are asked to evaluate the GERBER 2000 hat making machine. This replacement will result in an increase of $50,000 in earnings before interest and taxes per year. However, the GERBER 2000 will cost $175,000. The salvage value will be $17,000.

The firm's tax rate is 40 percent, and the depreciation is straight line to zero over 10 years. The firm's cost of capital (required rate of return) is 20 percent, and there is a 10 percent subsidy on new investment for new hat making machines.

A) Based on the NPV technique, is the GERBER 2000 an acceptable replacement for the old hat making machine? (40%)