The Riley Corporation is considering whether or not to introducea modified version of one of its products, Newones. The productwould replace an existing product, Oldones. The product line has anestimated life of four years, regardless of which product the firmsells. The following information has been collected to help inmaking this decision.

• Sales of Newones is expected to be $165,000 per year in each ofthe next four years; manufacturing expenses will be $57,000 peryear. For Oldones, expected sales would be $80,000 per year andmanufacturing expenses would be $35,000 per year.
• Advertising and marketing expenses of $15,000 per year in eachof the next four years would be expected if Oldones were produced.If Newones were introduced, an initial (year 0) outlay of $18,000for advertising and promotion would be required in addition toannual expenditures of $25,000 per year for the next four years. Amarketing study costing $15,000 was used to determine expectedsales of Newones last year.
• The machinery that would be used to produce Oldones originallycost $140,000. It currently has a book value of $100,000. Annualdepreciation of $20,000 will be charged if the machine is kept. Theold machine could be sold now for $80,000 or sold after four yearsfor $5,000.
• To produce Newones, a new machine costing $200,000 would berequired. The new machine would be depreciated on a straight-linebasis to zero salvage value over its expected economic life of fiveyears. However, the machine would be sold for an estimated $50,000after four years.
• The firm’s marginal tax rate is 30%; the firm’s cost of capitalis 15%.

Should the firm replace Oldones with Newones? Show yourwork.