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Holiday Manufacturing 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 2years old, cost $800,000 new, and has a $384,000 book value and a remaininguseful life of 5 years. It was being depreciated under MACRS using a 5-yearrecovery period and therefore has the final 4 years of depreciation remaining. Ifheld until the end of 5 years, the machineâ€™s market value would be $0. Over its5-year life, the new machine should reduce operating costs by $350,000 peryear. The new machine will be depreciated under MACRS using a 5-yearrecovery period. The new machine can be sold for $200,000 net of removal andclean up costs at the end of 5 years. An increased investment in net workingcapital of $25,000 will be needed to support operations if the new machine isacquired. Assume that the firm has adequate operating income against which todeduct any loss experienced on the sale of the existing machine. The firm has a9% cost of capital and is subject to a 40% tax rate on both ordinary income andcapital gains.a. Develop the relevant cash flows needed to analyze the proposedreplacement.b. Determine the net present value (NPV) of the proposal. You can use theNPV function for this problem.c. Determine the internal rate of return (IRR) and MIRR of the proposal.d. What is the highest cost of capital the firm could have and still accept theproposal? Explain.
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