Ibita Ltd is considering an investment of 2,80,00,000 (purchase price) in new equipment to replace old equipment with a book value of 1,20,00,000 and a market value of 2,00,00,000. If the firm replaces the old equipment with the new equipment, it expects to save 1,75,00,000 in operating costs the first year. The amount of these savings will grow at a rate of 12 % per year for each of the following three years.

The old equipment has a remaining life of four years. It is being depreciated by the straight-line method. 33.3% of the original book value of the new equipment will be depreciated in the first year, 39.9% will be depreciated in the second year, 14.8% will be depreciated in the third year, and 12.0% will be depreciated in the final year. The salvage value of both the old equipment and the new equipment at the end of 4 years is 0.

Assume that the purchase and sale of equipment occurs today and all other cash flows occur at the end of their respective years. If the firms cost of capital is 14% and is subject to a 40 % tax rate, find:

a. the net investment

b. the after-tax incremental cash flow at the end of each year

c. the internal rate of return on the investment

d. the net present value of the investment

Should they go ahead with the investment? Explain in your own words the reason for your final conclusion