Bryce Canola Oil Company is planning to replace its old harvester machine with a new one, to speed up its production process. The machine will cost the company $1 million, inclusive of delivery and set-up charges. The machine can be depreciated on a straight-line basis over five years. This capital expenditure qualifies for the recently announced 4% investment allowance for agribusiness, by the Federal Government.

The new harvester will speed up production in the canola fields by 50%, and the company expects revenues to increase from $1.2 million per year to $2.1 million per year. However, expanded production will increase operating costs by $440,000 each year. The new harvester will have to be insured at an additional cost of $25,000 per year, payable in advance.

At the end of five years, the company expects to sell the new harvester for a salvage value of $290,000.

The company will incur a new bank loan to fund this purchase and the lender has indicated an interest rate of 7.5% p.a. The company's tax rate is 30%. The firm typically applies an after- tax required rate of return based on its WACC for routine equipment replacement proposals. This rate will be 9% p.a., considering the impact of the new bank loan.

1. a)What are incremental cash flows, for the purposes of investment evaluation?
2. Should the interest expense for the new bank loan be included in the incremental cash flow analysis?
3. (b)Set up a table of incremental cash flows over the useful life of this machine.
4. (c)Calculate the Net Present Value (NPV), Internal Rate of Return (IRR), and Payback Period for this investment proposal.
5. (d)Discuss if the company should replace its old harvester with a new one, given your answers in part (c). Note that the firm usually prefers a Payback Period of less than 2 years.