Pasha Corporation is trying to determine the initial investment required to replace an old machine with a new, more sophisticated model. The proposed machine’s purchase price is $480,000, and an additional $20,000 will be necessary to install it. It will be depreciated under MACRS using a 5-year recovery period (Depreciation rates for MACRS 5-year recovery period for which rates are assumed to be 0.2, 0.32, 0.19, 0.12, 0.12 and 0.05 respectively). The present (old) machine was purchased 3 years ago at a cost of $340,000 and was being depreciated under MACRS using a 5- year recovery period. The firm has found a buyer willing to pay $380,000 for the present machine and to remove it at the buyer’s expense. The firm expects that a $10,000, $12000 as well as $13000increase in cash, inventories and receivables respectively and an $11,000 besides $7000 increase in accruals and payables will accompany the replacement. The firm pays taxes at a rate of 38%.                                                         

	with proposed Machine		with present machine
year	revenue	expenses excluding depreciation and interest	year	revenue	expenses excluding depreciation and interest
1	2320000	2100000	1	2200000	1990000
2	2520000	2300000	2	2300000	2110000
3	2320000	2100000	3	2400000	2230000
4	2520000	2300000	4	2400000	2250000
5	2320000	2100000	5	2250000	2120000

Pasha Corporation expects to be able to liquidate the new machine at the end of its 5-year usable life to net $50,000 after paying removal and cleanup costs. The old machine can be liquidated at the end of the 5 years to net $10,000. The firm expects to recover its net working capital investment upon termination of the project.

a) Compute relevant cash flows.

b) Find NPV if cost of financing is 9%.