Parboil Ltd, a local factory, has been considering the replacement of its boiler. The new boiler would cost Parboil $2,300,000, and freight and customs would amount to $120,000. In addition, there would be an installation cost of $300 000. The new boiler would have a useful life of 10 years and would be depreciated down to a salvage value of $40,000 over this period. Acquisition of the new boiler would reduce operating costs by $972,000 per year but would require a $30,000 increase in annual maintenance costs. Major repairs would be required in Year 4 and Year 8, at an estimated cost of $70,000 and $75,000 respectively. At the end of the boilers useful life, it would have to be dismantled at an estimated cost of $25,000. Three months ago, the boilers maintenance team attended a training course for the maintenance of the new type of boiler. The course cost the firm $360,000. The firm uses the straight-line depreciation method to depreciate all its assets and requires a 15% rate of return. The tax rate is 35%.

a) Show the relevant after-tax cash flows needed to analyze the proposed replacement. (15 marks) b) Calculate the NPV of the proposed project (10 marks) c) What is the PI of the proposed project? (2 marks) d) Calculate the IRR of the proposed project. (8 marks) e) Calculate the ARR of the project (8 marks) f) Advise the company as to whether the boiler should be replaced. (2 marks) g) The new boiler comes with an optional upgrade which will significantly reduce the emissions produced by the factory. The upgrade would cost an additional $450,000. How would this affect the projects NPV? (5 marks] h) The Managing Director has insisted that, if the new boiler is selected, the upgrade should be included. Based on your response to part (g) how could this be justified?