III. Norwich Tool Case

Norwich Tool is considering the replacement of an existing machine. The new machine costs $$1\mathrm{.}2$ million and requires installation costs of $$150,000.$ The existing machine can be sold currently for $$185,000.$ It is two years old, originally cost $$700,000,$ and has a $$500,000$ book value and a remaining life of $5$ years. This equipment is being depreciated on a straight line basis to a zero salvage value.

Over its $5-$year life, the new machine should reduce operating costs by $$350,000$ per year. $($i$.$e$.$ from $$800,000$ to $$450,000$ annually$).$ The new machine will be depreciated on a straight$-$line basis over a five$-$year life to a $$200,000$ salvage value. An increased investment in working capital of $$25,000$ will be needed in year $0$ to support the operations of the new equipment. The working capital will be recovered at the end of five years. The firm has a $9\%$ cost of capital and is subject to a $40\%$ tax rate. $($Note: Firm revenues will remain constant at $$2$ million per year with the new equipment$).$

A$.$ Determine the free cash flows for the project

B$.$ Determine the NPV$,$ IRR, Payback and Discounted Payback for the project.