You are given the following information for a replacement project for machines. Each

machine currently in use has a net book value of $$1$ million, and would continue to be

depreciated on a straight$-$line basis to a net book value of zero over the next $5$ years. The plant

engineer estimates that the old machines could be used for as many as $10$ more years. The

purchase price for the new machines is $$5$ million apiece, which would be depreciated over a

$10-$year period on a straight$-$line basis to a net book value of $$500,000$ each. Each new

machine is expected to produce a pre$-$tax operating savings of $$1\mathrm{.}5$ million per year over the

machine it would replace. You estimate that you could sell the old machines for $$250,000$

each. Installation of each new machine would be expected to cost $$600,000$ in addition to the

purchase price. Of this amount $$500,000$ would be capitalized in the same way as the

purchase price, and the remaining $$100,000$ would be expensed immediately. The increases

in inventory and accounts payable cause a required increase in net working capital of $W=$

$$20,000.$ The tax rate is $40\%.$

Answer the below questions.

$($a$)$ What is the initial cash investment for the new equipment?

$($b$)$ The sale of the machine currently in use would have two effects on

future cash flows. The first effect creates a tax saving. Describe this positive

effect.

$($c$)$ The second tax effect on future cash flows causes a net outlay. Describe

this effect.

$($d$)$ Compute the net initial outlay.