You are considering replacing an old machine which was purchased 5 years ago at $150,000. The old machine is still working and has five more years of useful life. If you sell the old machine today, you can sell at $50,000. The new machine costs you $200,000 and has a life of five years. Use straight-line method for deprecation. The new machine is more efficient; therefore, it not only increases the sales by $25,000 per year but also reduces the operating expenses (excluding depreciation) by $50,000 per year. Replacing the old machine with the new machine requires additional initial investment in the working capital by $20,000. Five year from now, the old machine can be scrapped at $5,000 whereas the new machine can be scrapped at $12,000. The tax rate is 35% and required rate of return is 15%.

a. Estimate the Incremental Initial cash flow. b. Estimate the Incremental Operating Cashflows from Year 1 to Year 5. c. Estimate the Final Year incremental cash flows including the incremental terminal cash flows. d. Compute the NPV of the incremental cash flows and write your recommendation.