Integrative Investment decision Holliday Manufacturing is considering the replacement of an existing machine. The new machine

costs million and requires installation costs of $.$ The existing machine can be sold currently for before taxes. It is

$2$ years old, cost new, and has a book value and a remaining useful life of $5$ years. It was being depreciated under

MACRS using a $5-$year recovery period and therefore has the final $4$ years of depreciation remaining. If it is held for $5$ more years,

the machine's market value at the end of year $5$ will be $.$ Over its $5-$year life, the new machine should reduce operating costs by

per year. The new machine will be depreciated under MACRS using a $5-$year recovery period. The new machine can be sold for

net of removal and cleanup costs at the end of $5$ years. An increased investment in net working capital of will be needed

to support operations if the new machine is acquired. Assume that the firm has adequate operating income against which to deduct any

loss experienced on the sale of the existing machine. The firm has a cost of capital and is subject to a tax rate.

$$

$$1\mathrm{.}21$ $$157,000$ $$192,000$

$$790,000$ $$379,200$

$1$

$$0$

$$351,000$

$$199,000$ $$24,000$

$8\mathrm{.}6\%40\%$

a$.$ Develop the net cash flows needed to analyze the proposed replacement.

b$.$ Determine the net present value $($NPV$)$ of the proposal.

c$.$ Determine the internal rate of return $($IRR$)$ of the proposal.

d$.$ Make a recommendation to accept or reject the replacement proposal, and justify your answer.

e$.$ What is the highest cost of capital that the firm could have and still accept the proposal?

a$.$ Develop the relevant cash flows needed to analyze the proposed replacement.

Calculate the initial investment: $($Round to the nearest dollar.$)$

Cost of the new machine $

Installation cost $

Installed cost of new asset $

Proceeds from sale of existing machine $

Tax on sale of existing machine $

Total after$-$tax proceeds from sale $

Increase in net working capital $

Initial investment $

Calculate the operating cash flows from the existing machine: $($Round to the nearest dollar.$)$

Cash Inflows Existing Machine

Year $1$

Depreciation $

Net profits before taxes $

Taxes $

Net profits after taxes $

Operating cash inflows $

$($Round to the nearest dollar.$)$

Cash Inflows Existing Machine

Year $2$

Depreciation $

Net profits