The Maxwell Corporation is a small manufacturing firm located in Palo Alto, California. The owner, Terry Baker, is considering replacing an existing grinding machine with a faster machine that has greater output capacity and operates with less labor. An alternative to buying a new machine is to overhaul the existing grinder that has a current net book value of $60,000 and 3 years of remaining depreciable life (straight line). Since the existing machine has become unreliable, one of these two options must be chosen in order to continue serving current customer needs. Terry estimates that if she does nothing, Fairlands will totally lose its market position. Terry figures that she has already invested one month of her time to determine what her alternatives are. She estimates that the opportunity cost of the time spent was $45,000 as she could have been thinking about new product opportunities if she had not been tied up with solving her grinding problem. It would cost $300,000 to overhaul the current machine, but this outlay would increase its useful life to 5 years. Ms. Wageners accountant tells her that the new net book value of the overhauled old grinder, the existing net book value plus the overhaul expenditure, could be depreciated using a straight-line schedule over five years. If overhauled, the existing grinder would have a zero salvage value in five years. The old grinder has a current market value of $50,000. The new grinding technology would cost $750,000 including freight in and installation. This machine would be depreciated to zero over 5 years, also its economic life, and would have an estimated $100,000 salvage value at the end of the period. Because of programmable features, the new grinder would allow Ms. Baker to lay off one operator who currently earns $50,000 per y ear plus an additional 25 percent in benefits. Given Fairlands labor contract, labor costs plus benefits are expected to increase at the rate of inflation, estimated at 4% per year over the next five years. Ms. Baker estimated that the reduction of one laborer would allow her to shift the current annual overhead cost of one supervisor at $30,000 per year, from the grinding department to the finishing department. The supervisors salary also adjusts annually with inflation. Even though the new press has increased capacity, Ms. Baker does not feel any extra products could be sold until the end of year 2, i.e., revenues for both alternative presses would be equal for the first year. At that time, she estimates that incremental sales for the new press of $200,000 less variable expenses of $105,000 would result in additional nominal EBIT before tax of $95,000. Both revenues and expenses are expected to grow at the inflation rate of 4%. At the end of year 1, Net Working Capital would increase to 20 percent of nominal sales. The investment in Net Working Capital will be recovered at the end of the life of the project, regardless of which alternative is pursued. Fairlands is currently in the 35% marginal tax bracket, which is not expected to change during the next years. Ms. Baker has estimated the appropriate cost of capital or required rate of return, is 15% for both projects. She has hired you to analyze this situation using the NPV approach and using nominal cash flows, which she finds more intuitive. She has agreed to pay you $10,000, which is a tax-deductible expense for Fairlands, for your prompt completion of the analysis. In considering the decision about the news press versus the overhaul, Ms. Baker has determined the t=0 outlay will be financed in the firms target capital structure proportions, or 45% from equity and 55% from debt. Fairlands can arrange a five- year term loan at a current rate of 12% per annum before taxes. Ms. Baker wants to be sure that financing costs are properly included in the analysis. a. Which investment choice should Ms. Baker pursue? Should she overhaul or buy a new grinder? Show all calculations. b. How should Ms. Baker incorporate the financing costs into the project analysis