1. **State the problem:** Calculate the initial cash outflow when replacing an old machine with a new one, considering costs, sales increase, scrap cost decrease, tax effects, depreciation, and investment tax credits (ITC). 2. **Identify given data:** - Old machine cost: 100000 - Old machine life: 10 years - Old machine age: 5 years (remaining life 5 years) - Old machine salvage value: 0 - Old machine current sale price: 50000 - New machine cost: 200000 - New machine life: 10 years - Increase in sales: 25000 per year - Decrease in scrap cost: 10000 per year - Tax rate: 50% (0.5) - ITC rate: 10% (0.1) - Depreciation method: straight-line on 100% cost 3. **Calculate book value of old machine:** Depreciation per year old = $\frac{100000}{10} = 10000$ Accumulated depreciation = $10000 \times 5 = 50000$ Book value = $100000 - 50000 = 50000$ 4. **Calculate ITC on old machine and ITC to be returned:** Original ITC on old machine = $0.1 \times 100000 = 10000$ Remaining life fraction = $\frac{5}{10} = 0.5$ ITC to be returned = $10000 \times 0.5 = 5000$ 5. **Calculate after-tax proceeds from sale of old machine:** Gain or loss on sale = Sale price - Book value = $50000 - 50000 = 0$ Tax effect on sale = $0 \times 0.5 = 0$ After-tax sale proceeds = Sale price - ITC to be returned - Tax effect = $50000 - 5000 - 0 = 45000$ 6. **Calculate ITC on new machine:** ITC new = $0.1 \times 200000 = 20000$ 7. **Calculate initial cash outflow:** Initial outflow = Cost of new machine - ITC new - After-tax sale proceeds Initial outflow = $200000 - 20000 - 45000 = 135000$ **Final answer:** The initial cash outflow generated by the machine replacement is **135000**.