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

Original Machine: Initial cost = 1,000,000; Annual depreciation = 180,000; Purchased 2 years ago; Book Value = 640,000; Salvage today = 700,000; Salvage in 3 years = 150,000

New Machine: Initial cost = 600,000; 3-year life, straight-line depreciation; Salvage in 3 years = 100,000; Cost savings = 50,000/year

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?