1) XYZ Company is planning to replace its old machine and they received three different offers. 1st Offer: Installation cost is $675,000. The sale of the old machine will bring in $105,000 after taxes. Operating cash inflows generated by the new machine will exceed the operating cash inflows of the old machine by $90,000 in each year of a 10-year period. At the end of year 10, liquidation of the new machine will yield $100,000 after taxes, which is $30,000 greater than the after-tax proceeds expected from the old machine had it been retained and liquidated at the end of year 10. 2nd Offer: Installation cost is $595,000. The sale of the old machine will bring in $65,000 after taxes. Operating cash inflows generated by the new machine will exceed the operating cash inflows of the old machine by $60,000 in each year of the first half of the 10-year period and $130,000 in each year of the second half of the 10-year period. At the end of year 10, liquidation of the new machine will yield $45,000 after taxes, which is $18,000 greater than the after-tax proceeds expected from the old machine had it been retained and liquidated at the end of year 10. 3rd Offer: Installation cost is $525,000. The sale of the old machine will bring in $55,000 after taxes. Operating cash inflows generated by the new machine will exceed the operating cash inflows of the old machine respectively by $40,000; $50,000; $60,000; $80,000; $90,000; $90,000; $100,000; $100,000; $120,000 and $120,000 in a 10-year period. At the end of year 10, liquidation of the new machine will yield $50,000 after taxes, which is $20,000 greater than the after-tax proceeds expected from the old machine had it been retained and liquidated at the end of year 10. In order to make this investment, XYZ Company is primarily interested in measuring its weighted average cost of capital. In the previous year they reported earnings available to common stock of $6,300,000. Also, they paid a dividend of $2.15 on each of its 1,000,000 common shares outstanding. The market price of the common stock is $53 and dividends are expected to grow at a rate of 4.5% per year for the predictable future. XYZ Company can issue $3.00 dividend preferred stock for a market price of $32.00 per share where the flotation costs would amount to $4.2 per share. XYZ Company can also issue $1,600-par-value, 10% coupon, 5-year bonds that can be sold for $1,850 each with flotation costs amount to $55.00 per bond.

b) Identify the relevant cash flows for the new machine offers and show their cash flows on a timeline.