You are operating an old machine that is expected to produce a cash flow of $5,000 in each of the next 3 years before it fails. You can replace it now with a new machine that costs $20,000 but is much more efficient and will provide a cash flow of $10,000 a year for 4 years.
Should you replace the equipment now? The discount rate is 15 percent. Show your work.
The solution contains the computation of discounted cash flow for replacing the existing machine