Boulder Mountain Chemical Corporation (BMCC) is a Texas based producer and distributor of a broad range of industrial chemicals. BMCCs Chief production engineer, Rocky Cliffs is considering replacing the packaging machines at its Houston distribution facility. The current packaging machines were purchased 6 years ago at a cost of $1.6 million. At that time, they were classified under the 15-year MACRS depreciation category and have been depreciated accordingly for the past 6 years. Rocky thinks that these machines could be used for as many as 7 more years. If they are used for the next 7 years, it is estimated that the machines could be sold at that time for $125,000. The new packaging machines under consideration would cost $3.2 million to purchase and install. These new machines would also be depreciated under the 15 year MACRS schedule. These new machines are estimated to be able to produce pre-tax cash operating savings of $1.1 million for each of the next 7 years at which time they are expected to be replaced. It is believed that, at that time, the new machines could be sold for $1.6 million. Since these new machines are believed to be more efficient at packaging the firms products, Rocky estimates that it will need to make a fully recoverable investment of $30,000 in additional inventory balances. Simultaneously, because of trade credit, Boulders accounts payables balance would increase by $10,000. Should Boulder continue operating its existing packaging machinery, it will incur a one-time cash expense of $750,000 to repair damage its machines suffered as a result of a particularly strong thunderstorm. With these repairs to existing machinery, Boulder will incur annual cash operating expenses of $5 million. Should Boulder elect to upgrade its packaging machinery, it will sell its existing machines today for $300,000. With either packaging equipment, BMCC will produce revenues of $10 million per year for the next 7 years. BMCC pays income taxes at a marginal rate of 40% and assigns a required return of 8% for this project. Being something of a simpleton, Rocky asks for your assistance in evaluating this proposal. He asks you to complete the following items for analysis.

Calculate the internal rate of return of both alternatives; (1) continuing with the existing packaging equipment and (2) purchasing the new packaging equipment.