Estimate Relevant Cash Flows: Wyle Company is considering a proposal to acquire new manufacturing equipment. The new equipment has the same capacity as the current equipment but will provide operating efficiencies in direct and indirect labor, direct material usage, indirect supplies, and power. Consequently, the savings in operating costs are estimated at $150,000 annually. Only 60 percent of the estimated annual savings can be obtained in the first year. The new equipment will cost $300,000. Wyle will incur a one-time cost of $30,000 to transfer the production activities from the old equipment to the new equipment. These costs will be deductible for tax purposes in Year 1. The current equipment has been fully depreciated for book and tax purposes. Wyle Company could receive $5,000 net of removal costs if it elected to buy the new equipment and dispose of its current equipment at this time. Wyle currently leases its manufacturing plant. The annual lease payments are $60,000. The lease, which will have five years remaining when the equipment installation would begin, is not renewable. Wyle Company would be required to remove any equipment in the plant at the end of the lease. The cost of equipment removal is expected to equal the salvage value of either the old or new equipment at the time of removal. The asset must be depreciated for tax purposes as follows: Year I, $60,000; Year 2, $120,000; Years 3-5, $40,000 per year. Any gain or loss on disposal is taxed at ordinary income tax rates.

The company is subject to a 40 percent income tax rate and requires an after-tax return of at least 12 percent on any investment.

Required:

a. Calculate the differential after-tax cash flows for Wyle Company's proposal to acquire the new manufacturing equipment.

b. Calculate the net present value of Wyle Company's proposal to acquire the new manufacturing equipment.