Best Taste Canned Food Inc. (BTCF) is one of the largest Japonese food and beverage companies established in 1970 and headquartered in Tokio. The process of preserving food in cans has changed over the previous fifty years. BTCF prefers to use the latest technology in production to increase the quantity produced and decrease costs.

Currently, the company is using Press15, an essential machine to fill different processed foods into cans, purchased five years ago for 3,000,000TL. This machine is being depreciated to a value of 0 over 10 years. After the maintenance service conducted a week ago, the mechanics say that Press15 can be used for another 5 years in the company's production processes. Press 15 can be sold for a price of 1,000,000TL today but if the machine is used for another 5 years, its expected market price will be only 150,000TL. Press15 can produce 1,200,000 canned foods per year and each canned food is sold for 15TL. The variable cost of production is 13TL per can. Furthermore, the maintenance cost for Press15 is 750,000TL per year.

Lara, Chief Operations Officer, finds out that there is a new machine, Press20, in the market. She is thinking about replacing Press15 with Press20, which sells for 5,000,000TL today. The company has to spend an additional 100,000TL for the shipment and installment. Press20 can also be used for five years, but the tax laws require it to be depreciated to a value of 0 over 3 year period using the straight-line depreciation method. Press20 will have a market value of 1,500,000TL in five years. Press20 can produce 1,300,000 cans per year and each canned food is sold for 15TL. The variable production cost will be 12TL per can. Since Press20 is technologically more advanced, the maintenance costs will be higher at 900,000TL per year.

With Press15, the company holds 20% of the next year’s revenues as inventory. However, if the company switches to Press20, then 18% of the next year’s revenues will be held as inventory. BTCF is in the 35% tax bracket and the company asks for a 15% rate of return on this replacement project.

1. Calculate the net capital spending at year 0 and year 5.

2. Calculate the change in networking capital investment of the company throughout the life of the project.

3. Calculate the operating cash flows for years 1 through 5.

4. Calculate the net present value (NPV) and internal rate of return (IRR) and then decide if BTCF should replace Press15 with Press20.