Suppose that your current machine is outdated, as the Chief Financial Officer, you feel that the firm would benefit from replacing the current machine. You have estimated a savings in operating costs from $200,000 annually to $150,000 annually. The WACC is 10%. However, your required return for this project is 12%.

Using the following information, calculate the Incremental Cash Flows for the next 10 years

Calculate the Discounted Payback Period, Net Present Value, Profitability Index, and Modified Internal Rate of Return.

Should we accept the project? Why?

Existing Machine Cost $294,000 Conventional Financing Installation $5,000 $1,000 Shipping Training $3,000 Proposed Machine $200,000 Cost None Financing Installation Shipping Training Change in inventory 4 yrs Age 5 yr MACRS Depreciation Method $75,000 Current Market Value 10 yrs Usable Life Remaining $10,000 Salvage Value -$10,000 Change in inventory Age 5 yr MACRS Depreciation Method Current Market Value Usable Life Remaining Salvage Value 10 yrs $50,000 40% Tax Rate 40% Tax Rate 5 year MACRS Depreciation Schedule Percent Depreciation Recovery Year 1 20 2 32 3 19 on AwN 4 12 5 12 6 5 Existing Machine Cost $294,000 Conventional Financing Installation $5,000 $1,000 Shipping Training $3,000 Proposed Machine $200,000 Cost None Financing Installation Shipping Training Change in inventory 4 yrs Age 5 yr MACRS Depreciation Method $75,000 Current Market Value 10 yrs Usable Life Remaining $10,000 Salvage Value -$10,000 Change in inventory Age 5 yr MACRS Depreciation Method Current Market Value Usable Life Remaining Salvage Value 10 yrs $50,000 40% Tax Rate 40% Tax Rate 5 year MACRS Depreciation Schedule Percent Depreciation Recovery Year 1 20 2 32 3 19 on AwN 4 12 5 12 6 5