MapleWood Ltd$.,$ a pulp and paper company, has recently appointed a new CEO, Sarah Robbins. As her first initiative, Sarah proposed a major capital expenditure program for MapleWood to the board of directors: that MapleWood replace its production equipment with new and much more efficient equipment.

While the cost of the new equipment at $$1\mathrm{.}5$ billion is significant, she argues that the new equipment will not only be more energy efficient using $25\%$ less power; it will also use the raw materials more efficiently with almost $40\%$ less waste. She also suggests that by becoming more environmentally friendly in its production processes, MapleWood will attract new customers who are interested in improved sustainability practices and, as a result, sales are likely to grow by $5\%$ from their current level of $$7\mathrm{.}2$ billion to $7\mathrm{.}56$ billion.

The increased efficiency of the new production equipment means that the cost of goods sold $($COGS$)$ is expected to fall from its current level of $60\%$ of sales to $57\mathrm{.}5\%$ of sales. These savings are a direct result of the reduction in energy consumption and in the amount of waste being generated by the production process. These changes result in a need to increase net working capital by $$25,000,000.$ The company's current tax rate is $28\%.$

The total cost of the new equipment will be $$1\mathrm{.}5$ billion, of which $$1\mathrm{.}475$ billion is the capital outlay and $$25$ million is the cost of installation. The new equipment has an estimated useful life of $15$ years, at the end of which its estimated salvage value is $$50$ million. At the end of the five$-$year planning horizon the equipment is expected to be worth $$700$ million. If replaced, the existing equipment can be sold for $$275$ million today. This equipment has a remaining life of approximately five years, at the end of which it is expected to have zero salvage value.

The equipment is in an asset class with a CCA rate of $10\%$ and qualifies for the Accelerated Investment Incentive for $1\mathrm{.}5$ times the CCA in the year of acquisition. On disposal, there will be a positive balance remaining in the CCA class.

Because MapleWood is changing its strategy toward more sustainable production, for the time frame of the project, this will be a riskier project than the firm on average and the appropriate discount rate for this project is $8\mathrm{.}5\%.$

Required

a$)$ Calculate the payback period for the project

b$)$ Calculate the net present value