EEE is thinking about purchasing a new machine to replace an existing machine.

The existing machine generates revenues of $1,500,000 per year and costs $860,000 per year to operate. The existing machine requires an investment in operating net working capital of $125,000. The existing machine was purchased 3 years ago for $1,250,000. The existing machine has a market value today of $275,000. The existing machine could be operated for another 5 years at which time it could be sold for $115,000.

The new machine would cost $1,475,000. It could be operated for 5 years. The expected salvage value is $235,000. The new machine will generate revenues of $1,500,000 per year. The new machine will cost $450,000 per year to operate. The new machine will require an investment in operating net working capital of $160,000.

The companys corporate tax rate is 40%, the CCA rate is 30% and the required rate of return is 12%. Assume the asset class remains open.

1. What are the incremental operating costs?

2. What is the incremental operating cash flow in the list approach?

3. What is the present value of the salvage value?

4. What is the present value of the operating net working capital recovered at the end of the project?