Use the data below for the problem.

Year Project Y Project Z

0 ($420,000) ($420,000)

1 400,000 170,000

2 170,000 156,000

3 Empty 146,000

4 Empty 175,000

Both projects have an 11% cost of capital.

1. Assume that the cost to replicate Project Y in 2 years will increase to $500,000 because of inflationary pressures. How should the analysis be handled now, and which project should be chosen?

2. You are also considering another project which has a physical life of 3 years, that is the machinery till be totally worn our after 3 years. However, if the project were terminated prior to the end of 3 years, the machinery would have a positive salvage value. Here are the project's estimated cash flows:

Year Cash Flow Salvage

0 ($850,000) $850,000

1 310,000 675,000

2 450,000 375,000

3 384,000 0

Using the 10% cost of capital, what is the project's NPV if it is operated for the full 3 years? Would the NPV change if the company planned to terminate the project at the end of Year 2? At the end of Year 1? What is the project's optimal (economic) life?

Please show work in excel with formulas.