Mandarino Cohen is considering replacing an operating machine. The new machine has a cost of SEK 1'200,000 and requires an installation cost of SEK 150,000. Currently, the machine in operation can be sold. It is two years old, its original price was 800,000 kronor, it has a book value of therefore still has 4 years of depreciation left. If the company keeps it for 5 more years, its value.

Over its useful life of 5 years, the new machine should reduce operating costs by 350,000 kroner per year. The proposed machine would be sold for a net amount of 200,000 kroner, without incurring removal and cleaning costs. If purchased, the company would have to increase its net working capital to support operations. Assume that the company has adequate operating income against which to deduct any losses experienced from the sale of the current machine. The company has a cost of capital of 9% and is subject to a tax rate of 40%. a. Develop the relevant cash flows necessary 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. Would you recommend accepting or rejecting the replacement proposal? Justify your answer.