Company ZYZ is considering an investment in a new machine, in order to replace an old one. The old machine has a book value of 500,000, remaining life 5 years, and can be sold currently for 400,000. The new machine entails an initial cash outlay of 1,100,000,

installation cost of 400,000, and is going to be depreciated on a straight line basis over 5 years with no expected salvage value. The firm expects to be able to: a) sale the new machine at the end of year 5 for 200,000 and b) reduce net working capital by 100,000 when the new machine is installed, but required working capital will return to the original level when the machine is sold after 5 years. The new machine is expected to reduce operating expenses by

600,000 per year over its 5-year life. If Company ZYZ is in the 30 percent tax bracket and the cost of capital is 8 percent, answer questions 1 to 4 below.

1.What is the investment cost?

a. 970,000 b. 1,070,000 c. 1,100,000 d. 1,200,000

e. None of the above

22. What are the annual net cash flows of the project for years 1 to 4?

a. 450,000 b. 480,000 c. 500,000 d. 550,000

e. None of the above

2.What is the net cash flow of the project for year 5?

a. 450,000 b. 480,000 c. 520,000 d. 550,000

e. None of the above

2What is the net present value?

a. 1,000,000 b. 906,100 c. 846,496 d. 855,396

e. None of the above