Sun Shine Inc. is considering replacing one of its equipments to cut its production costs. The replacement of this equipment will have no effect on the revenues of the company. The existing equipment is purchased 3 years ago for $1,050,000. At the time of purchase, the tax law required the company to depreciate this equipment down to a value of 0 using the straight line depreciation method over a seven year period. This equipment can be used in the production process for six more years. The operating cost of this equipment is $265,000, and the maintenance cost is $50,000 per year. This equipment can be sold for $765,000 today and $40,000 in 6 years from today. Sun Shine Inc. has to pay $1,400,000 to purchase the new equipment. The company has to spend an additional $160,000 to have the equipment modified to meet its needs and have it shipped and installed in its factory. This equipment will be used in the production process for six years as well. However, the tax laws require this equipment to be depreciated down to a value of 0 over an eight year period using the straight line depreciation method. The operating cost of this equipment will be $110,000, and the maintenance cost is $20,000 per year. This equipment can be sold for $350,000 at the end of year 6. Due to this equipment being more efficient, the company can reduce its inventory level by $25,000 at the time of initial investment. Last month, the company hired a consulting firm to identify the most appropriate equipment to replace its existing one. The company has to pay $75,000 to this consulting company for its services in exactly a year from today. The appropriate tax rate is 30%. The required rate of return on this replacement project is 10%.

a. (14 points) Calculate the net capital spending of the company for this project.

b. (4 points) Calculate the change in net working capital investment of the company throughout the life of this project.

c. (12 points) Calculate the operating cash flows of the company for this project.

d. (12 points) Calculate the NPV, IRR and Profitability Index for this project.

e. (4 points) Based on the results of your analysis in part (c) of this question, decide whether the firm should replace its existing equipment or not. Briefly explain your decision