Arroy Snackfoods is considering replacing a five-year-old machine that originally cost $75,000. It was being depreciated using straight-line to an expected salvage value of zero over its original 10-year life, and could now be sold for $40,000. The replacement machine would cost $215,000 and have a five-year expected life. It would be depreciated using the MACRS 5- year class life. The expected salvage value of this machine after 5 years is $30,000. The new machine is expected to operate much more efficiently, saving $6,000 per year in energy costs. In addition, it will eliminate one salaried position saving another $68,000 annually. The firm's marginal tax rate is 25% and the WACC is 9.5%. a. Setup an operating cash flow statement, and calculate the payback, discounted payback, MPV, IRR, and MIRR of the replacement project. Should the project be accepted? b. At what discount rate would you be indifferent between keeping the existing equipment and purchasing the new equipment? Arroy Snackfoods Old Machine New Machine Cost 75,000 215,000 Depreciation Schedule Salvage for Depreciation Class Current Salvage Value 40,000 215,000 Depreciation Base 215.000 Actual Expected Salvage 30,000 Year (ear] Year 2 Year 3 Year 4 Year 5 Original Life 10 Old 7,500 7,500 7,500 7,500 7:500 Remaining Life New 43,000 68,800 41,280 24, 768 24, 768 Depreciation Method Straight-Line MACRS Difference (35,500) (61,300) (33,780) (17,268) (17,268 Depreciable Life 10 Current Book Value 37,500 215,000 Energy Savings 6.000 Salary Savings 68,000 Tax Rate 25% WACC 9.5% Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Revenues 0 0 0 0 0 Expenses (74,000) (74,000) (74,000) (74,000) (74,000) Depreciation (35,500) (61,300) (33,780) (17,268 (17,268) Pre-Tax Operating Income 109,500 135,300 107,780 91,268 91,268 Taxes 27,375 33,825 26,945 22,817 22,817 Add:Depreciation (35,500) (61.300) 33.780 (17.268 (17,268) After-Tax Operating Cash Flow 46,625 40,175 47,055 51,183 51,183 Terminal Cash Flow 25.596 Total After-tax Cash Flow (175,625) 46,625 40.175 47.055 51,183 76.779 Discount Factor 1.00 0.91 0.83 ).76 0.70 0.64 Discounted Cash Flows (175,625) 42,580 33,506 35,840 35,602 48,772 Payback Discounted Payback Period Cash Flows Payback Period Cash Flows Payback (175,625) (175,625) 46,625 FALSE 42,580 FALSE 40.175 FALSE 33,506 FALSE 47,055 FALSE 35,840 FALSE 51,183 3.82 35,602 FALSE 76.779 4.12 48,772 4.58 NPV 20,675 Internal Rate of Return 13.59% Modified Internal Rate of Return 11.96% Discount Rate 13.59% NPV