Old Machine: The machine has a current installed cost of Year₀ =$ 400,000 and a remaining economic life of 6 years (if the company decides to keep it). Its current net price is $ 400,000. We assume that if the company would decide to purchase it, this would cost the amount of 400,000 $ in year (0). Below are given the relevant annual depreciation amounts:

Year	Annual Depreciation
1	100,000
2	130,000
3	50,000
4	55,000
5	50,000
6	15000
Total	400,000

If the old machine will be kept, it is expected that the machine could be sold at the end of year 6 for $ 40,000, according to the initial estimation. The tax rate for the company is 35 % or (0.35). Machine A This new machine costs $ 1000,000. It has an additional installation cost of $ 100,000. Thus, the installed cost is Year₀= $ 1100,000. This machine could be sold at the end of year 6 for Year₆ =$ 150,000 (residual value). The purchase of this machine is expected to increase the net working capital of the company by 50,000 at the year₀ (Time of purchase). The machine has an installed cost of Year₀ = $ 1100,000 and an estimated economic life of 6 years. Below are given the annual depreciation amounts:

Year	Annual Depreciation
1	200000
2	300000
3	250000
4	150000
5	150000
6	50000
Total	1100000

The tax rate for the company is 35% (0.35). Machine B This machine costs $ 550,000. It has an additional installation cost of $ 20,000. Thus, the installed cost is Year₀=$ 570,000. The machine has an installed cost of Year₀= $570,000 and an estimated economic life of 6 years. Below are given the annual depreciation amounts:

Year	Annual Depreciation
1	120000
2	200000
3	100,000
4	60,000
5	60,000
6	30,000
Total	570,000

The Machine B can be sold at the end of year 6 for net $ 70,000 (Residual Value). The tax rate for the company is 35% or (0.35). Other data:

2. Operating cash flow:

It is intended to present the operating inflows for each of the three machines as below: Earnings Before Depreciation and Taxes

Year	Machine A	Machine B	Old Machine
1	300,000	170,000	110,000
2	250,000	217,000	95,000
3	275,000	225,000	90,000
4	380,000	300,000	90,000
5	317,000	245,000	85,000
6	200,000	200,000	50,000

2. Cost of Capital:

When evaluating an investment, it is required to take into consideration (a) the time value of money to be invested (opportunity cost) and (b) the risk taken in the investment (risk premium). The Capital Asset Pricing Model (CAPM) is used as a formula to estimate the cost of capital which is the key input in the capital budgeting process and the valuation of an investment, financial manager will follow CAPM to calculate the cost of capital which is actually the required rate of return. It is worth to mention that all percentages are given by the general manager and they are based on assumptions.

2. R_f = 4.5 %
4. R_m = 10 %
6. B = 1.5

So, the cost of capital is equal to: 4.5% + 1.5 (0.10-0.45) = 12.75% Required:

2. Compute Total Initial Net Investment (Cash outflow at the time of purchase)
4. Calculate cash flows for each machine (machine A, B and old machine)
6. Calculate Relevant cash flows (Machine A- Old Machine) and (Machine B - Old Machine)
8. Evaluate the projects using capital budgeting techniques:
   2. Payback Period
   4. Profitability Index
   6. Net Present Value (NPV)
   8. Internal Rate of Return (IRR)
11. Finally, which projects would be selected based on your investigations