You recently began working for Orange Fizz Company

You recently began working for Orange Fizz Company. Company management is
contemplating the replacement of its existing, three-year old bottling machines that
originally cost $2,400,000 with newer and more efficient ones. The old, existing
machines were placed on the MACRS five-year class life depreciation schedule three
years ago. Total operating costs for the old bottling machines are $1,100,000 per year and
Orange Fizz will bottle 12 million bottles per year each year for the next seven years. The
firm expects to realize a $100,000 return from salvaging the old machines in 7 years;
however, the existing machine may be sold now to another firm in the industry for
$400,000. It retained, the old machines would be operational for the next 7-years.
The new machines, if purchased, would cost $2,600,000 and would be placed on a
MACRS five-year class life depreciation but will be kept in operation for the next 7
years. The machines would have an estimated salvage value of $270,000 in seven years.
Total annual savings in operating costs of $570,000 will be realized if the new bottling
machines are installed. The company is in the 40% tax bracket, and it has a 10% WACC.
Should the replacement be made? Use a relative (incremental) cash flow analysis
similar to what we did in class and in your text and determine the NPV and IRR for the
replacement project.