Pro-Sports, a sports equipment manufacturer, has a machinecurrently in use that was originally purchased two years ago for$80,000. The firm is depreciating the machine on a straight-linebasis using a five-year recovery period. The present machine willlast for the next five years or, once removal and clean-up costsare taken into consideration, it could be sold now for$50,000.

Pro-Sports can buy a new machine today for a net price of $120,000(including all installation costs). The proposed machine will bedepreciated using a five-year straight-line depreciation period. Ifthe firm acquires the new machine, there will be no change in itsinvestment in net working capital.

Profit before depreciation and taxes (PBDT) is expected to be$90,000 for each of next five years for the present machine, and$110,000 for each of next five years for the proposed machine. Thecorporate tax rate for the firm is 28%.

Pro-Sports expects to be able to sell the proposed machine at theend of its five-year usable life for $20,000 (after paying removaland clean-up costs). Alternatively, the present machine is expectedto net $5,000 on its sale at the end of the same period.Required:

A. Calculate the initial investment associated with the replacementdecision.  

B. Calculate the incremental operating cash flows associated withthe proposed replacement decision.

C. Calculate the terminal cash flow associated with the proposedreplacement decision.  

D. Assuming Pro-Sports has a WACC of 15%, please make arecommendation to the management as to whether or not the oldmachine should be replaced. Show all calculations to support yourrecommendation.