Dylan Inc. is considering replacing an old drilling machine that cost $240,000 three years ago with a new one that costs $500,000. The old machine has been depreciated using straight-line method with no salvage value over an estimated 8-year useful life. The old machine can be sold for $160,000 now or for $35,000 in five years. Management expects an increase in working capital of $20,000 if the new machine is acquired.

The new machine will be depreciated under the straight-line method over its estimated 5 year life and is expected to have a salvage value of $85,000 at the end of its life. This machine is expected to generate total revenues of $160,000 per year and incur total cash costs of $30,000 per year while the old machine generated total revenues of $40,000 per year and incurred total cash costs of $40,000 per year.

Dylan's income tax rate is expected to be 30 percent over the years affected by the investment. Dylan's hurdle rate for investments of this risk is 16 percent.

Required:

1. Determine Dylan's following incremental cash flows:

a. initial investment

b. operating

c. terminal

2. Calculate the following for the proposed investment in the new asset.

a. simple payback

b. net present value (NPV)

c. internal rate of return (IRR) methods?