A company is evaluating the purchase of a machine to improve product quality and output levels. The new machine would cost $1.2 million and would be depreciated for tax purposes using the straight-line method over an estimated seven-year life to its expected salvage value of $150,000. The new machine would require an addition of $130,000 to working capital. In each year of the machine's life, the machine would increase the company's pre-tax receipts by $410,000. The company has a 10% cost of capital and is in the 35% marginal tax bracket.

Part 1: Prepare a Cash Flow Spreadsheet that identifies the incremental cash flows for each year of the machine's life.

Part 2: Calculate the investment's net present value (NPV).

Part 3: Calculate the investment's internal rate of return (IRR).

Part 4: Should the company purchase the machine? Why or why not?