Gallatin, Inc., is deciding between investing in one of two machines in order to take on a new project. Each of the machines has an 8 year life. At the end of the 8 years, the machine will be sold at salvage value. Working capital is invested in the project immediately and reverts back to the company for use elsewhere at the end of the projects life. Additionally, the machine used for project A will require a cash expenditure for a major overhaul at the end of 3 years. A summary of the information related to each of the investments is presented below.

	Project A	Project B
Annual cash sales (for each of the 8 years)	$250,000	$400,000
Annual cash expenses (for each of the 8 years)	$130,000	$250,000
Annual depreciation on new equipment (for each of the 8 years)	$ 70,000	$ 93,750
Initial cost of new equipment	$600,000	$800,000
Salvage value of new equipment in 8 years	$ 40,000	$ 60,000
Working capital requirement	$ 80,000	$120,000
Cost to overhaul new machine	$ 25,000

1. Assuming Gallatins discount rate is 8%, compute the net present value (NPV) of each of the projects & state which project is preferable from an NPV perspective. To receive credit, present your work in a manner that demonstrates your understanding of the inflows and outflows (i.e. do not just provide an answer). (6 points)

I recommend using the Excel spreadsheet template attached to this assignment. If you do so:

• Be sure to label any rows added.
• Indicate (perhaps highlight) which number is the final answer for each project,
• State (type in) which project is preferable.

2. Compute the Internal rate of return (IRR) on each of the projects & state which project is preferable from an IRR perspective. Round your interest rate to two decimal places after the whole number (i.e. 2.33%). (4 points)

I recommend using the Excel spreadsheet template attached to this assignment. If you do so:

• Be sure to label any rows added

• Indicate (perhaps highlight) which number is the final answer for each project.