Problem 1 A company is considering replacing an old machine with a new one. The old machine is completely depreciated and can be sold for $50,000 in the market. The company intends to sell this machine if it is replaced. The new machine costs $450,000. The replacement of the machine will require an increase in the inventories by $250,000. The new machine is going to be depreciated over 4 years to 0 salvage value. The new machine will increase annual revenue by $170,000 in addition it will reduce annual operating costs by $30,000. This new machine can be sold for $100,000 in 4 years. The projects life is 4 years. The companys tax rate is 30% and the cost of capital is 12%.

1a.What is the CF0?

1b.What is CF4 (the cash flow to be used in NPV calculations)?

1c.What is the NPV of the project?

Problem 2 A company is evaluating the replacement of an old machine with a new one. Last year, the company hired a consultant to conduct a feasibility study about this replacement project, which cost them $500,000 at that time. The consulting fees were expensed last year.

The old machine was purchased 2 years ago for $3 million and was being depreciated using MACRS 5-year class (20%, 32%, 19.2%, 11.52%, 11.52% and 5.76%). The old machine can be sold for $1 million at this time. If the old machine is not replaced, it can be sold for $400,000 four years from now.

The replacement machine has a cost of $2 million, an estimated useful life of 4 years. This machine will be depreciated using straight-line method to 0 salvage value. The replacement machine would permit an output expansion, so sales would rise by $1 million per year; even so, the new machines much greater efficiency would cause operating expenses to decline by $250,000 per year. The new machine would require that inventories be increased by $1 million, but accounts payable and accrued expenses would simultaneously increase by $500,000 and 200,000 respectively. The interest expense on the debt component of the capital required for this project will be $250,000 annually. The new machine can be sold for $50,000 at the end of 4 years to another company.

The companys marginal federal-plus-state tax rate is 40%, and its WACC is 12%.

2a.What is the initial investment CF0?

2b.What is the CF1 (The cash flow to be used in NPV calculation)?

2c.What is the CF4 (The cash flow to be used in NPV calculation)?

2d.What is the NPV of the project?

please show all steps and all work! Thanks! (no excel please)