**Answer:**

$221344.48

**Explanation:**

Book value of existing machine = $500,000

remaining depreciable life = 5 years

salvage value = $300,000

cost of replacement machine = $2 million

depreciable life = 10 years

Tax rate = 40 %

Difference in the cost of new machine and salvage value of existing machine

= 2,000,000 - 300,000 = $1,700,000

Calculate the depreciation tax benefit of new machine = ( 500,000 / 5 ) * 0.4 = $40,000

<em>next calculate the present value of this tax benefit </em>

= $40000,PVAF(1.10,5years)^5 ------- ( 1 )

where the Annuity of 5 years at 10% = 1/(1.10)5 = 3.7907)

<u><em>Insert value into equation 1 (to calculate the present value of the tax benefit </em></u>

= 40000*3.79078676 = $1,51,631.47 ( present value of tax benefit )

<u><em>Determine the Annual depreciation tax advantage of the new machine </em></u>

= (2,000,000/10)*0.40 = $80,000

<u><em>Determine present value of this annuity </em></u>

= $80,000,PVAF(1.10,10years)^10 ------ ( 2 )

where the Annuity of 5 years at 10% = 1/(1.10)^10 ) = 6.144567

<em><u>Insert value into equation2 ( to calculate the present value of this annuity )</u></em>

= 80000 * 6.144567 = $491565.36

<u>Therefore the Net cost of the new machine will be </u>

= $491565.36 - $151631.47 - $1,700,000 = $1,360,066

<u>**Annual savings on the new machine in 10 years **</u>

= 1,360,066 / 6.144567 = $221344.48