Wonderland Pty Ltd is considering replacing an old illusion-generating machine in its magic-performing division with a state-of-the-art illusion-generating machine that would increase the sale revenues from $ 35,000 to $100,000. The new machine would cost the company $500,000 to purchase and has a life of 10 years. It also has an estimated salvage value of $50,000 at the end of its life.

The old machine was purchased 5 years ago at a cost of $200,000 and the accumulated depreciation shown in accounting records is $100,000. It has a remaining life of 5 years and as that time it will be worthless. However, the company can sell the old machine to other companies in the industry now for $120,000. Both the old machine and the new machine are depreciated using the straight-line method. The company has a tax rate of 30 percent and its required rate of return is 10 percent per annum.

Should the company replace the old machine now or later in five-year time? (Show all workings and state any assumptions that may be necessary).