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A company is considering replacing one of its machines with a new, more efficient machine. Calculate the payback period and net present value.

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A company is considering replacing one of its machines with a new, more efficient machine. The old machine presently has a book value of \$100,000 and could be sold for \$60,000. The old machine is being depreciated on a simplified straight line basis down to a salvage value of zero over the next five years, generating depreciation of \$20,000 per year. The replacement machine would cost \$300,000 and has an expected life of five years, after which it could be sold for \$50,000. Because of reductions in defects and material savings, the new machine would produce cash benefits of \$90,000 per year before depreciation and taxes. Assuming simplified straight line depreciation and the replacement machine is being depreciated down to zero for tax purposes even though it can be sold at termination for \$50,000 a 34 percent marginal tax rate, and a required rate of return of 15 percent, find:

1. The payback period

2. Net Present Value