ABC motors currently produces $200000$ motors per year, and expects output levels to rise by $2\%$ per year. Each motor requires $1$ gear. ABC buys gears from an external vendor at $$2\mathrm{.}50$ each. However, the manager believes that it would be cheaper to make these gears in$-$house. In$-$house production costs are $$1\mathrm{.}80$ per gear. To make these gears, ABC needs to buy a $$700000$ machine. Assume straight$-$line depreciation over $10$ years. This operation also requires additional working capital of $$40000$ now. This working capital will be recovered at the end of Year $10.$ The machine can be scrapped for $$10000$ in year $10.$ ABC's tax rate is $21\%,$ and it has a discount rate of $14\%.$

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Compute the incremental cash flows from this operation in each year. You may want to use an excel spreadsheet.

What is the NPV and IRR of this operation? Should ABC proceed with this operation?

Suppose there is uncertainty in the external vendor's selling price $($ $$2\mathrm{.}50+-$$$1\mathrm{.}00)$ and the in$-$house production costs $($$$1\mathrm{.}80+-$$$0\mathrm{.}80).$ Perform a sensitivity analysis