XYZ is now evaluating the purchase of a new machine for $210,000 installed with no NWC change. They plan to sell the machine at the end of 3 years for $30,000. MACRS 3 year depreciation. With the more efficient machine, labor savings per year are expected to be $70,000, $94,000 and $76,000 respectively. 40% tax. The cost of capital for this project is 8.%

The option of working cooperatively with another company has just been presented instead of purchasing the new machine. The details of this option are: initial investment of $120,000, net operating cash flows (years 1-3) of 47,000, 49,000 and 52,000 respectively (already takes into account depreciation effect and terminal cash flow so there is no need to calculate depreciation effect or terminal value just use these as-is for your analysis), cost of capital for this project is 8.2%.

1. Besides analyzing the numbers, list two areas of concern XYZ might look at when deciding whether to choose working cooperatively with another company. State in 25 words or less.

2. Still using XYZ, they expect to increase sales by 6% next year. Complete a proforma income statement with COGS and operating expenses increasing at the 6%, interest expense stays the same and depreciation stay the same. What is their EAT, earnings after tax?