REPLACEMENT ANALYSIS

The Bigbee Bottling Company is contemplating the replacement ofone of its bottling machines with a newer and more efficient one.The old machine has a book value of $650,000 and a remaining usefullife of 5 years. The firm does not expect to realize any returnfrom scrapping the old machine in 5 years, but it can sell it nowto another firm in the industry for $295,000. The old machine isbeing depreciated by $130,000 per year, using the straight-linemethod.

The new machine has a purchase price of $1,175,000, an estimateduseful life and MACRS class life of 5 years, and an estimatedsalvage value of $130,000. The applicable depreciation rates are20%, 32%, 19%, 12%, 11%, and 6%. It is expected to economize onelectric power usage, labor, and repair costs, as well as to reducethe number of defective bottles. In total, an annual savings of$210,000 will be realized if the new machine is installed. Thecompany's marginal tax rate is 35%, and it has a 12% WACC.

a: What initial cash outlay is required for the new machine?Round your answer to the nearest dollar. Negative amount should beindicated by a minus sign.
$

b: Calculate the annual depreciation allowances for bothmachines and compute the change in the annual depreciation expenseif the replacement is made. Round your answers to the nearestdollar.

Year	Depreciation Allowance, New	Depreciation Allowance, Old	Change in Depreciation
1	$	$	$
2
3
4
5

c. What are the incremental net cash flows in Years 1 through 5?Round your answers to the nearest dollar.

Year 1	Year 2	Year 3	Year 4	Year 5
$	$	$	$	$

d: Should the firm purchase the new machine?
-Select-YesNo