A manufacturer is considering replacing a production machine tool. The new machine, costing $3700, would have a life of 4 years and no salvage value, but would save the firm $500 per year in direct labor costs and $200 per year indirect labor costs. The existing machine tool was purchased 4 years ago at a cost of $4000. It will last 4 more years and will have no salvage value at the end of that time. It could be sold now for $1000 cash. Assume that money is worth 8% and that the difference in taxes, insurance, and so forth, for the two alternatives is negligible. Use an annual cash flow analysis to determine whether the new machine should be purchased.

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