7. The Acme Company is considering an asset replacement decision. The company's current equipment is performing acceptably, but new technology would be faster and cheaper. New equipment will cost $1,490,000, with a useful life of 6 years. Current equipment was purchased 2 years ago for $1,500,000 and could be scrapped now for $650,000. If no change is made the current machines will be completely worn out in 6 years' time, with a salvage value of $0. The new equipment has an expected salvage value of $400,000 in 6 years' time. New equipment would save the company $450,500 per year, after tax. Installing the new equipment would also require a working capital increase of $75,000, which would be fully recovered at time of salvage. A CCA rate of 20% applies, and the PVCCATS method is appropriate. The company's tax rate and required return are 30% and 13.5%, respectively. Calculate the NPV and the IRR.

8. With regard to the NPV calculated above should the company purchase the new equipment? Discuss, considering the potential pitfalls of NPV and IRR analysis.