Sarita Claus has a big decision to make. His production manager, Ebenezer Elwell, tre presented him with a proposal to update the production facilities at the North Pole. The new equipment would eliminate approximately 500 elves through automation. As Sants financial analyst, you must consider the proposal and make a recommendation to Santa, The new equipmeyt will cost $375.000 replacing the old, fully-deprecinted machine that can be sold for $20.000. The new machine will be depreciated using MACRS with a s year useful life. A $40,000 reduction in inventory will be possible, due to the simplifications of the new equipment. The 500 elves will be given early retirement, at an annual pre-tax saving of $100,000 per year for each of 5 years. The new equipment has an estimated resale value of $50,000 in 5 years, but the old equipment will have no resale value if kept an additional 5 years. Santa's tax rate is 35 percent, and an estimated 20 Cost of New-37.percent retum is required for this project, Tax (55x2go) T o Sale Tasule -4000 A What is the initial investmeat? 40.000 Puertere of new 35,000 per of old. - 320 Sol of old 20,00 B. What are the operating cash flows? cost of old +2, AAC Remember: Santa has no Papper C. What is the terminal cash flow? Revenue! D. What is the NPV? E. What is the IRR2 F. What will you recommend to Santa