In order to increase production capacity, Gunning Industries is considering replacing an existing product machine with a new technologically improved machine on January 1, 2019. The following information is being considered by Management:

The new machine would cost $160,000 in cash. Shipping, installation, and testing wold cost an additional $30,000.

The new machine is expected to increase annual sales by 20,000 units at a sales price per unit of $40 each.

Associated incremental operating costs include $30 per unit in variable costs and total fixed cost of $40,000 per year.

The new machine investment will require an immediate additional working capital of $35,000, which is expected to be recovered at the end of year 5.

Gunning uses a straight-line method of depreciation for financial reporting purposes and tax reporting purposes. The new machine has a life of 5 years and no salvage value

Gunning is subject to a 40% tax rate.

Gunnings cost of capital is 10%

1. Gunnings net cash outflow in this project is:

a. $190,000

b. $195,000

c. $204.525

d. $225,000

2. Gunnings discounted annual depreciation tax shield for the year 2019 is:

a. $13,817

b. $16,762

c. $20,725

d. $22,800

3. The new machine will contribute a discounted net-of-tax contribution margin of:

a. $242,624

b. $303,280

c. $363,936

d. $454,920

4. The overall discounted cash flow impact of the working capital for the new machine is:

a. $(7,969)

b. $(10,080)

c. $(13,265)

d. $(35,000)

5. What is the payback period for this new machine:

6. What is the Net Present Value of this plan to purchase the new machine:

7. What is the Profitability Index of this plan to purchase the new machine:

8. What is the Internal rate of return for this replacement plan: