Show all arithmetic or Excel entries where relevant. Be careful with showing sufficient decimals, currencies and monetary units (e.g., million or billion).

1. (20 points) Evaluate the following capital budgeting project by a profitable food products firm. The company is considering investment in specialized equipment for a cost of $800 million including installation and modification expenses. The equipment is categorized as a five-year asset to be depreciated to a zero-salvage value. The firm can depreciate 20% of the investment in year one and 32% in year two when the equipment will be sold, net of expenses, to another organization for $400 million. The investment is projected to generate $170 million in pre-tax, net operating income in year one and $200 million in year two. The firm pays income taxes and capital gains taxes at the 20% marginal rate. The firm is profitable and would offset taxes (or recapture prior taxes paid) in any year the project is unprofitable. The firms weighted, average after-tax cost of capital is 5.00%. First, develop the annual after-tax, pre-leverage operating and non-operating cash flow for the investment for year zero, year one and year two. Clearly label all cash flows. Second, derive both the NPV and the IRR for the project and indicate whether and why the project is acceptable or unacceptable for each model.