X, Inc., a manufacturer of vehicle rims, is considering replacing an existing piece of equipment with a more sophisticated machine. The three year project information is given below. There is no market value for the existing machine after three more years of use, but the new machine can be sold for $80,000 at the end of the third year. They will require a $10,000 investment in net working capital at the start of the project. The firm pays 40% taxes on ordinary income and capital gains.

a. Calculate the project relevant cash flows for years 0 through 3, including the initial investment, after-tax operating cash flows, and the terminal cash flow. (show work)

b. Calculate the new machines discounted payback period (show work). The company WACC is 10%.

c. If the WACC is 10%, calculate the NPV for the new machine (show work).

d. Calculate the MIRR for the new machine (show work).

e. Should the company invest in this project? Why or why not?

Project Information Existing Machine Proposed Machine Cost $155,000 Cost $215,000 Purchased 3 years ago Installation 20,000 Depreciation MACRS 5-year Depreciation MACRS 3-year Current Market Value $95,000 Year Earnings before Depreciation and Taxes Existing Machine Proposed Machine Amount Year Amount $110,000 $180,000 $95,000 $180,000 $85,000 $180,000 1 1 2 2 lo 3