1) XY co. bought a machine 5 years ago for $15,000. The machine had an expected life of 12 years with no salvage value then. XY uses straight line depreciation.

Now XY can buy a new machine for $17,500 that will last 7 years and have no salvage value. This machine will increase quality and increase sales from $20,000 to $22,000 a year and cut operating costs from $12,000 to $10,000 a year. The old machine can be sold now for $1,000. Taxes are paid quarterly and the firm's hurdle rate is 15%. The firm's tax is 40%. Should XY buy the new machine.