Norwich tool is considering the replacement of an existing machine. The new machine costs $1.2 million and requires installation costs of $150,000. The existing machine can be sold currently for $185,000 before taxes. It is 2 years old, cost $700,000 new, and has a $500,000 book value and a remaining useful life of 5 years. This equipment is being depreciated on a straight line basis to a zero salvage value. Over its 5-year life, the new machine should reduce operating costs by $350,000 per year.(i.e.. from $800,000 to $450,000 annually). The new machine will be depreciated on a straight line basis over a five year life to a $200,000 salvage value. An increased investment in net working capital of $25,000 will be needed in year 0 to support operations of the new equipment. The working capital will be recovered at the end of five years. The firm has a 9% cost of capital and is subject to a 40% tax rate. (Note: firm revenues will remain constant at $2 Million per year with the new equipment).

A. Determine the free cash flows for the project.

B. Determine the NPV, IRR, Payback, and discounted payback for the project.

C. Resolve the first problem above except assume annual savings of $250000—only do NPV.

D. Resolve the first problem above except assume savings of $300000, no recovery of working capital and a zero salvage value (keep the same depreciation schedule as above)—only do NPV.

E. Resolve the first problem above except use a 15% cost of capital.