MacroStem Manufacturing Co. has an opportunity to invest in a new device that will replace two of the companys older machines. The new device costs $570,000 and requires an additional outlay of $30,000 to cover installation and shipping. The company spent $50,000 researching the viability of the project. The new device will cause the firm to increase its net working capital by $20,000 now and 20,000 in year 3 and year 8. Both the old machines can be sold the first one for $100,000 (book value of $80,000) and the second one for $150,000 (book value of $70,000). The original cost on the first machine was $200,000 and the original cost on the second machine was $140,000. The new machine will also be sold in year 10 for salvage value of $95,000. It is the companys policy to fully depreciate all machinery over 10 years on a straight-line basis. Production and sales from the new machine are expected to be 20,000 units per year. Each unit will have a contribution margin of $5 in the first year, and selling price and variable cost inflation is expected to be 4% per year thereafter. Prior to purchase of the machine, total fixed costs per year were $25,000 but with the new machine, total fixed costs will rise to $50,000 per year. The firm is in the 35% tax bracket. The appropriate discount rate is 10%.

Required:

a) Calculate the after tax cashflows over the investment horizon

b) Determine whether or not ABC should accept the project based on the Net Present Value criteria.

c) Calculate the IRR on the project and interpret result.