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The firm is subject to a 40% tax rate. The company's cost of capital is 8%. The estimated earnings before depreciation, interest, and taxes over

The firm is subject to a 40% tax rate. The company's cost of capital is 8%.

The estimated earnings before depreciation, interest, and taxes over the 5 years for both the new and the existing grinder are shown in the following table.

Earnings before depreciation, interest, and taxes

Year New grinder Existing grinder

1

2

3

4

5

$53,000

53,000

53,000

53,000

53,000

$26,000

24,000

22,000

20,000

18,000

b. Determine the incremental operating cash flows associated with the proposed grinder replacement.

c. Use the estimated initial cash flow and the terminal cash flow in the part one together with the operational cash flow identified in this part, evaluate the project using net present value and the internal rate of return.

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