A company is evaluating the purchase of Machine A. The new machine would cost $120,000 and would be depreciated for tax purposes using the straight-line method over an estimated ten-year life to its expected salvage value of $20,000. The new machine would require an addition of $30,000 to working capital. In each year of Machine As life, the company would reduce its pre-tax costs by $40,000. The company has a 12% cost of capital and is in the 35% marginal tax bracket.

a. Identify the incremental cash flows from investing in Machine A.

b. Calculate the investments net present value (NPV).

c. Calculate the investments internal rate of return (IRR).

This problem follows Problem #2. It is now five years later. The company did buy Machine A, but just this week Machine B came on the market; Machine B could be purchased to replace Machine A. If acquired, Machine B would cost $80,000 and would be depreciated for tax purposes using the straight-line method over an estimated five-year life to its expected salvage value of$20,000. Machine B would also require $30,000 of working capital but would save an additional $20,000 per year in pre-tax operating costs. Machine As salvage value remains $20,000, but it could be sold to-day for $40,000.

1. Identify the incremental cash flows from converting to Machine B
2. Calculate this investments net present value (NPV).
3. Calculate this investments internal rate of return (IRR).
4. Should the company convert to Machine B? Why or why not?