I need detailed solution steps and also need including formulas

Q1:

Bryce Canola Oil Company is planning to replace its old harvester machine with a new one, to speed up its production process. The machine will cost the company $1 million, inclusive of delivery and set-up charges. The machine can be depreciated on a straight-line basis over five years. This capital expenditure qualifies for the recently announced 4% investment allowance for agribusiness, by the Federal Government.

The new harvester will speed up production in the canola fields by 50%, and the company expects revenues to increase from $1.2 million per year to $2.1 million per year. However, expanded production will increase operating costs by $440,000 each year. The new harvester will have to be insured at an additional cost of $25,000 per year, payable in advance.

At the end of five years, the company expects to sell the new harvester for a salvage value of $290,000.

The company will incur a new bank loan to fund this purchase and the lender has indicated an interest rate of 7.5% p.a. The companys tax rate is 30%. The firm typically applies an after- tax required rate of return based on its WACC for routine equipment replacement proposals. This rate will be 9% p.a., considering the impact of the new bank loan.

1. (a)What are incremental cash flows, for the purposes of investment evaluation?
2. Should the interest expense for the new bank loan be included in the incremental cash flow analysis?
3. (b)Set up a table of incremental cash flows over the useful life of this machine.
4. (c)Calculate the Net Present Value (NPV), Internal Rate of Return (IRR), and Payback Period for this investment proposal.
5. (d)Discuss if the company should replace its old harvester with a new one, given your answers in part (c). Note that the firm usually prefers a Payback Period of less than 2 years.

Q2

Sonata Music Supplies plan to expand its operations by launching three additional retail outlets in Victoria, Queensland and South Australia at a cost of $27 million.

Market analysts have provided forecasts of demand conditions for the next two years. There is a 55% chance that net cash flows in the first year will be $20 million. Otherwise, net cash flow in the first year will be $13 million instead.

If the first years net cash flow is in fact $20 million, then there is a 60% chance of net cash flows in the second year being $30 million. Otherwise, net cash flow in the second year will be $16 million instead.

If the first years net cash flow in in fact $13 million, then net cash flows in the second year can either be $24 million or $10 million. The likelihood of either outcome is 50%.

The companys required rate of return for investment projects is 10% p.a.

Draw a tree diagram depicting all possible net cash flow outcomes over the next years. (a) Calculate the expected NPV for this project.

(b) Calculate the standard deviation of expected NPV.

(c) Discuss if the company should proceed with the expansion, on the basis of expected risk and return.