capital budeting : replacement cost

a question about the replacement project

Let’s say:

Old machine: depreciation expense:1,800

New machine:

Revenue-cost: 8,000

Tax: 40%

depreciation expense: 5,000

as the old machine is not fully depreciated, for the operating cash flow in year 1, 2, 3…should we include the effect of depreciation expense of old machine?

  1. 8000 (0.6) + 5000 (0.4)

  2. 8000 (0.6) + (5000-1800)0.4

any idea which one is right?

(revenue - cost - depreciation expense ) (1 - taxes) + depreciation = after tax

the replacement mean you sold the machine, so you dont have it any more no reason to include depreciation