Hughesdale Ltd is considering to purchase a new machine with a price of $32 million to replace its existing machine. The current machine has a book value of $8 million and can be sold today for $9 million. The new machine is expected to have a four-year life, and the old machine has four years left in which it can be used. If the firm replaces the old machine with the new machine, it expects to save $8 million in operating costs each year over the next four years. Both machines will have no salvage value in four years. If the firm purchases the new machine, it will also need an initial investment of $500,000 in net working capital, which will be recovered at the end of the fourth year. To purchase the new machine, the company requires an additional $50,000 financing at 8% interest from its local bank, resulting in additional interest payments of $4,000 per year. The required return on the investment is 10%, and the tax rate is 39%.

Required:

a. Calculate the projects total Free Cash Flow in year 0. [2 marks]

b. Calculate the projects total Free Cash Flow every year from Year 1 to Year 3. [2 marks]

c. Calculate the projects total Free Cash Flows in Year 4. [2 marks]

d. Should the old machine be replaced? Explain. [2 marks]

e. What assumptions do NPV and IRR make about the reinvestment of a projects cash flows over its life? Which assumption is more realistic? Explain your answer. [2 marks]