1. Ingenious Devices, Inc. is considering a replacement for its damaged old cutting machine with a new laser cutting machine. Repairing this machine would cost $5,700. Management has requested information about a new machine from its vendor. The old machine has no salvage value. The estimated after-tax cash flow associated with the old machine for the next year is $2,000 and the firm expects that this cash flow will grow at a rate of 12% per year over the next four years.

The new model of the new laser cutting machine has a price of $8,000 and the firm expects to generate after-tax cash flows of $3,000 with this machine for the next four years. These cash flows will grow at an annual rate of 15% over the next four years. If the firms WACC is 14% and its reinvestment rate is 10%, determine the following:

a) Calculate the payback period, discounted payback period, NPV, PI, and IRR of the existing machine. If no option were available to replace this old machine, would it make sense to repair it?

b) Considering the new model as a replacement project, should the firm buy the new machine? Determine the payback period, discounted payback period, NPV, PI, and IRR of the new model versus the old machine using the incremental initial costs and annual after-tax cash flows to answer this question