MAD Inc. is considering the replacement of an existing machine. The new machine costs$950,000 and requires installation costs of $100,000. The existing machine can be sold currentlyfor $400,000 before taxes. It is 3 years old, cost $800,000 new, and has a remaining useful life of5 years. This old machine is/was being depreciated using 5-year simplified straight-linedepreciation to zero and therefore has the final 2 years of depreciation remaining. If it is helduntil the end of 5 years, the old machines market value will be $0. Over its 5-year useful life, thenew machine should increase revenues by $60,000 and reduce operating costs by $300,000 peryear. The new machine will be depreciated using 5-year MACRS depreciation. The newmachine can be sold for $150,000 at the end of 5 years. An increased investment in workingcapital of $25,000 will be needed to support operations if the new machine is acquired. Assumethe firm has adequate operating income against which to deduct any loss experienced on the saleof the existing machine. The firm has a 12% cost of capital and is subject to a 40% tax rate.1. Determine the initial cost for the proposed replacement.2. Determine the annual (non-terminal) operating cash flows for years 1 through 5 forthe proposed replacement.3. Determine the terminal cash flow for the proposed replacement at the end of year 5.4. What is the net present value and internal rate of return for the proposedreplacement?5. Make a recommendation to accept or reject the replacement proposal, and justifyyour answer.