ABC Manufacturing Limited has a machine currently in use that was originally purchased three years ago for $120,000. The firm depreciates the machine on the straight-line basis using a five-year recovery period. The present machine will last for the next five years or, once removal and clean-up costs are taken into consideration, it could be sold now for $70,000.

ABC can buy a new machine today for a net price of $145,000 plus installation costs of $15,000. The proposed machine will be depreciated using a five-year straight-line depreciation period. If the firm acquires the new machine, its working capital needs will change: accounts receivable will increase $15,000, inventory will increase $19,000 and accounts payable will increase $16,000.

Profits before depreciation, interest, and taxes (PBDIT) for the present machine are expected to be $95,000 for each of the next five years. For the proposed machine, the expected PBDIT for each of the next five years is:

Year 1 $105,000

Year 2 $110,000

Year 3 $120,000

Year 4 $120,000

Year 5 $120,000

The corporate tax rate for the firm is 30%.

ABC expects to be able to liquidate the proposed machine at the end of its five-year usable life for $24,000 (after paying removal and clean-up costs). The present machine is expected to net $8,000 on liquidation at the end of the same period. ABC expects to recover its net working capital investment on termination of the project. PS: Assume 30% tax for both income and capital gain) Required: Based on the above information, creating / using excel answer the following questions:

1. Calculate the initial investment.
2. Prepare a depreciation schedule for both the proposed and the present machine. Both machines are depreciated using a five-year recovery period. Remember the present machine has only three years of depreciation remaining.
3. Calculate the operating cash inflows for ABC for both the proposed and the present machine.
4. Calculate the terminal cash flow associated with the project.
5. Assuming that the cost of capital of ABC is 7.60% and the average inflation rate for the next five years is estimated at 2.00%, calculate internal rate of return and net present value for the present and the proposed machine. Which alternative appears to be better. Make a recommendation (remember to substantiate your statements). Use Excel to answer this part of the question too.