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We oprate an elderly machine . It generates positive net cash flows but at diminishing rate.

5. We oprate an elderly machine . It generates positive net cash flows but at diminishing rate. Next year it will let us earn $5000, after two years $3000, at the end of third year $2000 then $1000, and finally just $500 at the end of fifth year. We considering replacing it with Machine C that costs $40,000 and generates $2000 in the first year , $4000 in the second and $10,000for next 7 years . Then it scraped . Is it profitable to replace ? If yes, in which year? The relevant discount rate is 9%.

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Solution 4.docx

Option 1 Operating
an elderly
machine
Particulars
Year 1
Year 2
Year 3
Year 4
Year 5
Cash inflow
5000
3000
2000
1000
500
Discounting
factor
0.917431
0.84168
0.772183
0.708425
0.649931
Present
value...

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