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Top-Ten Inc. is considering replacing its existing machine that is used to produce musical CDs. This existing machine was purchase 2 years ago at a base price of $70,000. Installation costs at the time for the machine were $4,000. The existing machine is considered a 3-year class for MACRS. The existing machine can be sold today for $40,000 and for $20,000 in 3 years. The new machine has a purchase price of $70,000 and is also considered a 3-year class for MACRS. Installation costs for the new machine are $5,000. The estimated salvage value of the new machine in 3 years is $30,000. This new machine is more efficient than the existing one and thus savings before taxes using the new machine are $5,000 a year. The company's marginal tax rate is 30% and the cost of capital is 12%. For this project, what is the incremental cash flow in year 2? MACRS Fixed Annual Expense Percentages by Recovery Class Year 33.33% 3-Year 5-Year 7-Year 10-Year 15-Year 20.00% 14,29% 10.00% 5.00% 32.00% 24.49% 18.00% 9.50% 17.49% 14.40% 8.55% 11.52% 12.49% 11.52% 44.45% 14:81% 19.20% 7.41% 7.70% 11 52% 8.93% 9.22% 6.93% 5.76% 8.93% 7.37% 6.23% 8.93% 6.55% 5.90% 4.45% 6.55% 5.90% 6.56% 5.91% 6.55% 5.90% 3.28% 5.91% 5.90% 5.91% 5.90% 5.91% 2.95% 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 For your answer, round to the nearest dollar, do not enter the $ sign, use commas to separate thousands, use a negative sign in front of first number is the cash flow is negative (do not use parenthesis to indicate negative cash flows). For example, if your answer is $3,005.87 then enter 3,006; if your answer is -$1.200.25 then enter -1,200 4 5 6 39 9 10 11 12 13 31 14 15 16 33.33% 20.00% 14.29% 10.00% 5.00% 44.45% 32.00% 24.49% 18.00% 9.50% 14.81% 19.20% 17,49% 14.40% 8.55% 7.41% 11.52% 12.49% 11.52% 7.70% 11.52% 8.93% 9.22% 6.93% 5.76% 8.93% 7.37% 6.23% 8.93% 6.55% 5.90% 4.45% 6.55% 5.90% 5.91% 5.90% 5.91% Your Answer: 6.56% 6.55% 3.28% Answer 5.90% 5.91% For your answer, round to the nearest dollar, do not enter the $ sign, use commas to separate thousands, use a negative sign in front of first number is the cash flow is negative (do not use parenthesis to indicate negative cash flows). For example, if your answer is $3.005.87 then enter 3,006; if your answer is -$1,200.25 then enter -1,200 For this project, the incremental cash flow in year 2 is: 5.90% 5.91% 2.95%

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