Smiley Smelting, a manufacturer of high-quality aluminium tubing, has maintained stable sales and profits over the past 10 years. Although the market for aluminium tubing has been expanding by 3% per year, Smiley has been unsuccessful in sharing this growth due to the limited production capacity of their existing plant. To increase its sales, the firm is considering upgrading production capacity with the addition of new machinery costing $5,000,000. The vendor for the machine has agreed to install on site for an additional $250,000. The increased production will also result in additional production and marketing expenditure of $150,000 over the next 5 years. Sales revenue, as shown in the accompanying income statement for 2020, totalled $20,000,000. If the proposed machine is not purchased, sales are expected to remain at this level in each of the next 5 years, 2021 through 2025. With the new machine, production can be increased allowing sales to rise to the levels shown in the accompanying table for each of the next 5 years; cost of goods sold is expected to remain at 80% of sales; general and administrative expense is expected to remain at 10% of sales; and annual depreciation expense on the new machine is calculated based on MACRS 7-year asset class (see table below). The existing machine has no salvage value and will be discontinued if the new machine is purchased. If the new machine is not purchased, the old machine can continue in operation for another 8 years but will be fully depreciated (straight-line basis) after December 2022.

Smiley Smelting Income Statement for the Year Ended December 31, 2020
Sales Revenue	$20,000,000
Less: Cost of goods sold (80%)	16,000,000
Gross Profits	$4,000,000
Less: Operating expenses General and administrative expense (10%) Depreciation expense	---------------- $2,000,000 600,000
Total operating expenses	$2,600,000
Earnings Before Interest and Taxes	$1,400,000
Less Taxes (rate 25%)	350,000
Net profit after taxes	$1,050,000

Smiley Smelting Sales Forecast
Year 2021 2022 2023 2024 2025	Sales Revenue $20,500,000 21,000,000 21,500,000 22,500,000 23,500,000

1. Assuming a 25% tax rate, find the operating cash flows over the next 5 years associated with and without the new machine. (8 marks)
2. Calculate the incremental (relevant) operating cash inflows resulting from the proposed new machine purchase. (4 marks)

TABLE 4.2 Rounded Depreciation Percentages by Recovery Year Using MACRS for First Four Property Classes Percentage by recovery year a 7 years Recovery year 3 years 5 years 10 years 1 33% 10% 20% 32 14% 25 2 45 18 3 15 18 14 4 7 12 12 19 12 12 5 5 9 9 6 9 8 7 9 7 8 4 6 9 6 10 6 4 11 Totals 100% 100% 100% 100%