The National Parts Inc., an auto-parts manufacturer, is considering purchasing a rapid prototyping system to reduce prototyping time for form, fit, and function applications in automobile parts manufacturing. An out-side consultant has been called in to estimate the initial hardware requirement and installation costs. He suggests the following:

• Prototyping equipment: $187,000.
• Postcuring apparatus: $25,000.
• Maintenance: $36,000 per year by the equipment manufacturer.
• Resin: annual liquid polymer consumption: 1600 litres at $87.50 per litre.
• Site preparation: Some facility changes are required when installing the rapid prototyping system. (Certain liquid resins contain a toxic substance, so the work area must be well vented.)

The expected life of the system is 6 years with an estimated salvage value of $30,000. The proposed system is classified as a Class 43 property. A group of computer consultants must be hired to develop customized software to run on these systems. These software development costs will be $20,000 and can be expensed during the first tax year. The new system will reduce prototype development time by 75% and the material waste (resin) by 25%. This reduction in development time and material waste will save the firm $114,000 and $35,000 annually, respectively. The firm's expected marginal tax rate over the next 6 years will be 40%. The firm's MARR is 20%.

(a) Assuming that the entire initial investment will be financed from the firm's retained earnings (equity financing), determine the after-tax cash flows over the investment life. Compute the PE of this investment.

(b) Assuming the entire initial investment will be financed through a local bank at an interest rate of 13% compounded annually, determine the net after-tax cash flows for the project. Compute the PE of this investment.

(c) Choose the best option assuming you have to do one of the options.