Gamma Electronicscurrently processes food products with a machine it purchased several years ago.  The machine, which originally cost $600,000, currently has a book value of $300,000.  Gammais considering replacing the machine with a newer, more efficient one.  The new machine will cost $800,000 and will require an additional $200,000 for delivery and installation.  The new machine will also require Gamma to increase its investment in receivables and inventory by $80,000.  The new machine will be depreciated on a straight-line basis over five years to a zero balance.  Gamma expects to sell the existing machine for $400,000.  Gamma's marginal tax rate is 38 percent and the discount rate for Vista is 12 percent.

If Gamma purchases the new machine, annual revenues are expected to increase by $125,000 and annual operating costs (exclusive of depreciation) are expected to decrease by $30,000.  Annual revenue and operating costs are expected to remain constant at this new level over the five-year life of the project.  After five years, the new machine will be completely depreciated and is expected to be sold for $100,000.  (Assume that the existing unit is being depreciated at a rate of $60,000 per year.)

a) Determine the payback period for this project.

b) Using net present value recommend whether or not Gamma should purchase the new machine.