• Holliday Manufacturing is considering the replacement of an existing machine. The new machine costs $1,200,000 and requires installation costs of $150,000. The existing machine can be sold currently for $185,000 before taxes. It is two years old, cost $800,000 new, and has a $384,000 book value and a remaining useful life of five years. It was being depreciated under MACRS, using a five-year recovery period, and therefore has the final four years of depreciation remaining. If it is held for five more years, the machine’s market value at the end of year 5 will be $0. Over its five-year life, the new machine should reduce operating costs by $350,000 per year. The new machine will be depreciated under MACRS, using a five-year recovery period. The new machine can be sold for $200,000 net of removal and cleanup costs at the end of five years. An increased investment in net working capital of $25,000 will be needed to support operations if the new machine is acquired. Assume that the firm has adequate operating income against which to deduct any loss experienced on the sale of the existing machine. The firm has a 9% cost of capital and is subject to a 21% tax rate. Calculate the relevant cash flows; Initial Investment, Incremental Operating Cash Flows, and the Terminal Cash Flows 2. Using the values that you have calculated in question 1, calculate the following Capital Budgeting Techniques: a. Payback Period b. Net Present Value c. Internal Rate of Return (using the Implemented Excel formula) 3. From the above calculations, should Damon company buy the new machine?