Company Shoe Plus considers selling the machines it bought 3 years ago for 600,000 and replace them by new machines. The old machines have been depreciated linearly,1 year of depreciation is left, and can be sold right now for 200,000. The new machine require an investment of 800,000 and will be depreciated linearly over 4 years. The firm expects that this machine can also be sold at 200,000 in year 4. As a result of this investment, the next 4 years an annual saving of 100,000 in wages and an annual saving of 120,000 in energy costs can be realized. The annual maintenance costs will increase from 540,000 to 565,000 annually. The project will have no impact on the firms assets is 1.2,the beta(unlevered) of the firm is 1.1 and the projects beta is 1.4. The project will be completely financed by equity. The risk free rate is 2% and the market risk premium is 6%. The company is profitable and the tax rate is 30%.

A) Calculate the annul free cash flow.

B) What is the appropriate discount rate for this project(explain briefly)?

C) Would you advise the management to do this project based on the NPV?

D) The firm is also considering 2 alternative projects. Project B that requires an investment of 700,000 with an NPV of 400,000 and project C that requires an investment of 600,000 with an NPV of 800,000. The companys budget is limited to 1.5 million. Which of the 3 available projects should be selected by the firm? Show your calculations.