Theestimated net annual cost savings (cash benefits)before depreciation, interest, and taxes over the four years on the replacement of the old system with the new system are shown in the following table.

Year

1

2

3

4

The estimated net annual cost savings

155,000

170,000

198,000

202,000

The company needs to pay $100,000 compensation to the redundant workers due to Automation at the end of year one. These payments can be deducted for taxation purposes during year one.The company has estimated a 12% cost of capital for financing the new system.

You are required to:

1. The incremental operational cash flows (resulted on cost savings)(3 Points),
2. The terminal cash flow for replacing the existing machine with the new machine(2 Points)
3. Estimate the net present value (NPV) and Internal Rate of Return (IRR).(3 Points)
4. Should Lord of Chips proceed with the purchase of the new machine?(1 Points)