Norman Industrial Company (NIC) is considering the replacement of an existing machine. The new machine costs $2.3 million and requires installation costs of $250,000. The existing machine can be sold currently for $1,250,000 before taxes. It is 3 years old, costs $1,500,000 new, and has a $435,000 book value and a remaining useful life of 5 years. It is being depreciated under MACRS using a 5-year recovery period (see table, bottom of page 9 of exam) and therefore has the final 3 years of depreciation remaining. If the old machine is held for 5 more years, its market value will fall to zero by the end of that time. Both the new and the old machine will yield revenues of $2,000,000 per year, but the old machine will have operating costs of $1,600,000 annually, while the new machine’s annual operating costs are only $1,000,000. Over its 5-year operating life, the new machine should reduce operating costs by $600,000 per year. The new machine will also be depreciated under a 5-year MACRS recovery period. The new machine can be sold for $500,000 net of removal and clean-up costs at the end of 5 years. An increased investment of $50,000 will be needed to support operations if the new machine is acquired. Assume that the firm has adequate operating income against which to deduct any loss experienced on the sale of the existing machine. The firm has a 10% cost of capital and is subject to a tax rate of 30% on both ordinary and capital gains. a. Calculate the initial investment associated with this replacement decision. b. Calculate the incremental operating cash inflows associated with this decision. c. Calculate the terminal cash flow at the end of year 5 associated with this decision. d. Calculate the net present value for this project and recommend whether to accept or reject.