Garrison Corporation is considering the replacement of an old machine that is currently being used. The old

Garrison Corporation is considering the replacement of an old machine that is currently being used. The old machine is fully depreciated but can be used by the corporation through 1990. If Garrison decides to replace the old machine, Picco Company has offered to purchase it for $60,000 on the replacement date. The old machine would have no salvage value in 1990.

If the replacement occurs, a new machine would be acquired from Hillcrest Industries on January 2, 1986. The purchase price of $1,000,000 for the new machine would be paid in cash at the time of replacement. Due to the increased efficiency of the new machine, estimated annual cash savings of $300,000 would be generated through 1990, the end of it’s expected useful life. The new machine is not expected to have any salvage value at the end of 1990.

All operating cash receipts and operating cash expenditures are assumed to occur at the end of the year. Garrison employs the calendar year for reporting purposes. Ignore income taxes in answering the following question:

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