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The Cummings Bottling Company is contemplating the replacement of one of its bottling machines with a...

The Cummings Bottling Company is contemplating the replacement of one of its bottling machines with a newer and more efficient one. The old machine has been fully depreciated. The firm does not expect to realize any return from scrapping the old machine in 5 years, but can sell it now for $265,000. The new machine has a purchase price of $1,175,000, an estimated useful life and MACRS class life of 5 years, and an estimated salvage value of $145,000. It is expected to reduce overall operating costs by $255,000 every year over the next 5 years.

The company's marginal tax rate is 35 percent and its cost of capital is 13 percent.

Should the firm purchase the new machine?

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