Blue Creek Industrial Inc. is considering updating its production process. The managers are considering replacing a machine which it purchased four years ago with an installed cost of $620,000. There are 2 years of depreciation remaining using the MACRS rates given below. The new machine, a BIOVAT 3000, will cost $900,000 and will require an additional $29,000 for delivery and installation. This new unit will also require training costs of approximately $11,000. The MACRS rates are 20%, 32%, 19%, 12%, 11%, and 6% for years 1 through 6 respectively, and the marginal tax rate is 34%. The old machine is expected to be sold for approximately $320,000 today or $38,000 ten years from now.

If BCI purchases the new equipment, annual revenues are expected to increase by about $47,000 per year, however, the expenses are expected to decrease from $42,000 with the old equipment to $27,000 with the new machine in the first year. Beyond that, the companys expenses are expected to be an additional $3,000 less per year. Since the new machine is expected to be more efficient, net operating working capital (mainly due to required inventory) is expected to fall by $4,000 at the outset of the project and remain at that new level through the duration of the project.

a) (8 points) Calculate the year 0 cash flow which would be used for capital budgeting purposes.

b) (8 points) Calculate the year 1 net cash flow which would be used for capital budgeting purposes.