current capacity, DPL proposes to retire the old equipment and to buy new equipment that has triple the capacity of the old. This would allow for possible expansion of the regular line as well as providing the capacity for both the regular and the special dishes. The DPL plant manager estimates that if the new equipment is purchased, the greater efciency of the machine would permit a 10% savings in material cost and 25% savings in labor cost. Depreciation however would go from $0.15 per unit to $0.40 per unit, and there would also be the added cost of the interest on the loan to buy the equipment which is estimated at $0.41 per set. Fixed overhead per unit would decrease to $0.17 per unit. The estimated variable overhead cost per unit would be $0.50 per set. The selling, delivery and admin costs would remain consistent for the existing orders, however it is expected to be approximately % of the current costs for the special order. The cost of servicing the line would not change, and that no additional xed costs would be incurred. The interest is 12% per annum on the $2,400,000 loan that would be required to purchase the new equipment, divided by the 700,000 additional units. The principal is to be repaid in 3 equal annual installments. The loan is only for $2,400,000 as the company currently has $500,000 of available cash on hand. The total cost of the new equipment is $3,000,000 less a trade-in value for the old equipment of $100,000. Salvage value of new equipment in four years would be $800,000. For tax purposes, all equipment is considered as class 8. The owner of DPL has asked you, CA, whether he should follow through with this project, assuming that the tax rate is 40%. His cost of capital is estimated to approximate the interest rate offered by the bank. He is concerned with his cash position and wants to have a clear picture of the different cash ows of the company depending on the project, saying that he had spent too many years scraping by barely able to pay bills, and did not want to return to that position again- which is why he built up the cash reserve