One year ago, FIN222 Ltd purchased a machine used in manufacturing for $110,000. FIN222 Ltd is considering the purchase of a new machine to replace the current machine. The following information is available.

• You can purchase the new machine for $150,000 today. It will be depreciated on a straight-line basis over 10 years and will be able to be sold for $20,000 at the end of year 10.
• You expect that the new machine will produce a gross margin (revenue minus operating expenses other than depreciation) of $50,000 per year for the next 10 years.
• The current machine is expected to produce a gross margin of $20,000 per year for the next 10 years.
• The current machine is being depreciated on a straight-line basis over a useful life of 11 years and has no salvage value.
• As a result of the new machine, current assets will increase by $30,000 and current liabilities will increase by $20,000. The net working capital will be recovered in the terminal year.
• The market value today of the current machine is $60,000.
• The company tax rate is 30% and the opportunity cost of capital is 10%.

a) Calculate free cash flows from Year 0 to Year 10. (10 marks)

b) Calculate the standard payback period. If the cut-off year is 5 years, should FIN222 Ltd accept the new project and why? (2 marks)

c) Calculate the NPV. Should FIN222 accept the new project and why? (3 marks)

d) Establish the equation from which the IRR is solved. Assuming the IRR=23.17%, should FIN222 Ltd accept the project and why? (3 marks)

e) Discuss two disadvantages associated with the standard payback period method. (2 marks)