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    Replacement of equipment

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    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.

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    Solution Summary

    The solution contains the computation of discounted cash flow for replacing the existing machine