We are trying to decide whether to replace the original machine with a new machine.

Original Machine: Initial cost = $100,000, annual depreciation = $9,000, purchased 5 years ago, book value = $55,000, salvage today = $65,000, salvage in 5 years = $10,000

New Machine: Initial cost = $150,000, 5-year life, salvage in 5 years = 0, cost savings = $50,000 per year, 3-year MACRS depreciation.

Required return = 10% and Tax rate = 40%

a. Should we replace the original machine with the new machine?

b. What are the consequences of selling the old machine today instead of in 5 years?