Question 2 Total 15 marks) You, as a financial manager, are trying to decide whether to replace a machine on your production line The following nformation is available The new machine will cost $1,000,000, but will be more efficient than the old machine, reducing operating expenses by $500,000 per year (incremental revenue is zero). Your old machine is fully depreciated, but you could sell it for $50,000 today You would depreciate the new machine over a five-year effective life using the straight-line method. As a result of the new machine,current assets will increase by $60,000 and current liabilities will increase by $20,000. The net working capital will be recovered in the terminal year The terminal value of both the new and old machines at the end of Year 5 will be SO The company is subject to a 30% tax rate and the cost of capital is 15% Required a) Calculate the initial investment required by the new machine 4 marks) b) Calculate the incremental free cash flow in Years 1-5 (5 marks) Calculate the payback period. If the cut-off year is 3 years, should you accept the project and why? (3 marks) d) Calculate the NPV. Should you replace the machine and why