Reference no: EM132769817

XYZ Industries is considering the following project: Buying a new machine to replace an older machine. The new machine costs $1,500,000 right now and can be sold at the end 2 of its life in 6 years for $200,000. The old machine was purchased 7 years ago for $1,000,000 and can be sold for $300,000 today or for $100,000 in 6 years. Both, the old and the new machines have a CCA rate of 30%. XYZ Industries has just paid $110,000 for a study which indicates that the new machine will reduce annual manufacturing expenses by $400,000 per year. Since the new machine is more reliable, the plant will need to keep fewer spare parts in stock. Management expects that inventory levels can be reduced by $70,000 (at t=0) when the new machine is installed (note, at the end of the project, this change in net working capital will be reversed, i.e., inventory levels will increase again by $70,000 at the end of year 6). XYZ's marginal tax rate is 36%, and its required rate of return (RRR) is 11%.

Problem a) What is the initial cash outlay (the total cash flow at t=0)?

Problem b) What is the second year's cash flow (excluding the CCA Tax Shield)?

Problem c) What is the last year's cash flow (excluding the CCA Tax Shield)?

Problem d) What is the year 5 CCA?

Problem e) What is the PV CCA Tax Shield?

Problem f) What is the NPV of the replacement project?