(1)

The Taylor Corporation is using a machine that originally cost $66,000. The machine has a book value of $66,000 and a current market value of $40,000. The asset is in the Class 8 CCA pool. It will have no salvage value after 5 years and the company tax rate is 40%.

Jacqueline Elliott, the Chief Financial Officer of Taylor, is considering replacing this machine with a newer model costing $70,000. The new machine will cut operating costs by $10,000 each year for the next five years. Taylor's cost of capital is 8%.

Should the firm replace the asset? (Use NPV methodology to solve this problem.)

(2)

A&B Enterprises is trying to select the best investment from among four alternatives. Each alternative involves an initial outlay of $100,000. Their cash flows follow:

Year A B C D

1 $10,000 $50,000 $25,000 $0

2 20,000 40,000 25,000 0

3 30,000 30,000 25,000 45,000

4 40,000 0 25,000 55,000

5 50,000 0 5,000 60,000

Evaluate and rank each alternative based on a) payback period, b) net present value (use a 10% discount rate), and c) internal rate of return.