Please show all works including EQUATION and specific explanations on each step. !!!!!NO EXCEL FORM!!!!!

Please provide in EQUATION FORM.

ABC Inc. is considering the purchase of a new production machine for $1,400,000. The machine has a 5-year life. Although the purchase of this machine will not produce any increase in sales revenues, it will result in a before-tax reduction of labor costs by $500,000 per year. To operate this machine properly, workers would have to go through a brief training session that would cost $40,000 after tax. In addition, it would cost $150,000 after tax to install this machine properly. Also, its purchase would necessitate $300,000 in initial net working capital for the project, and an additional investment in net working capital of $60,000 every year thereafter. All net working capital will be recovered when the project ends. The machine is expected to be sold for $200,000 as it is scrapped at the end of the project. Assume simplified straight-line depreciation and that this machine is being depreciated down to zero, a 20 percent marginal tax rate, and a required rate of return of 5 percent.

1. What is the initial outlay associated with this project?

2. What are the operating cash flows associated with this project? (Use OCF = (S C) (1 Tc ) + D Tc)

3. What is the terminal cash flow in year 5?

4. Should this machine be purchased?

EXAMPLE ANSWER FORMAT (Please follow as under solution)

(a) Initial Cash Outlay Price of new machine: -$30,000 Current market value of old machine: $14,000 Tax effect of old machine: (12,000 - $14,000) x 0.34 = - $680 Net working capital: +$3,000 Total net outlay for new machine: -$13,680 (b) OCF due to new machine OCF = (S-C) (1 - Tc) + AD * T. = [1,500 - (-3,000)] x (1 -0.34) + (5,000 -2,000) x 0.34 = $3,990 (c) Terminal Cash Flow: Recovery of NWC: - $3,000 A Salvage Value x (1 T.) = (6,000 - 500) x (1 0.34) = $3,630 Total terminal cash flow: $630 0 0 -13,680 Year 1 2 3,990 3,990 0 0 3 3,990 0 4 3,990 0 5 3,990 0 6 3,990 630 OCF Capital Spending Total -13,680 3,990 3,990 3,990 3,990 3,990 4,620 Assuming that the required rate of return is 15%, the NPV of the replacement is =-13,680 +3,990 PVIFA(15%, 6) + 630 PVIF(15%, 6) = $1,692.45 > 0