A machine currently in use was originally purchased last year (one year ago) for $20,000. It is being depreciated using the straight-line method over a four-year period. A new machine can be purchased for $26,000 plus a $5,000 delivery and installation charge. The new machine will be depreciated using the straight-line method over a five-year period.

If the new machine is acquired, the investment in accounts receivables is expected to rise by $2,500, the inventory investment will increase by $1,000, and accounts payable will increase by $1,500. Net working capital is expected to increase each year at the same percentage as sales (revenue) over the life of the project.

Revenue is expected to be $7,500 per year with the old machine. Revenue with the new machine is expected to be $12,000 in year 1 and increase at the rate of 1 percent per year for year 2, 2 percent per year for years 3 - 4, and 3 percent per year for year 5.

Incremental operating costs associated with the new machine are expected to $1,000 in year 1 and increase by 1% per year over the life of the machine. At the end of four years, the old machine was expected to have a salvage value of zero, but it can be sold today for $12,000 before taxes. The new machine is expected to have a salvage value of $1,000 at the end of its life. The firm’s tax rate is 40 percent and the risk-adjusted discount rate is 12 percent.

PLEASE SHOW ALL WORK

1. Calculate the after-tax, incremental cash flows in year 0 to 5.

2. Calculate payback.

3. Calculate net present value.

4. Calculate internal rate of return.