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Bourbon Barrel Industries is trying to decide whether to replace their 50-year old barrel machine (which...

Bourbon Barrel Industries is trying to decide whether to replace their 50-year old barrel machine (which still requires a lot of hand labor and skill) with a new computer-aided, fully automatic machine. The existing machine has a zero book value, but could be sold to a more traditional barrel maker for $10,000. If used another 5 years it would be completely worn out and worth nothing.

The new machine has a cost of $100,000 (including installation) and would be depreciated over 5 years to a zero salvage value. In reality, the machine would still have a value of approximately $30,000 at the end of 5 years. The new machine wouldn't change revenue, but would reduce labor and maintenance expense by $22,500 per year. The firm's tax rate is 35% and the required rate of return on the project is 11%. What should the firm do?

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