Problem 3 (40 points) XYZ Industries is considering the following project: Buying a new machine to replace an older machine

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Problem 3 (40 points)

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 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%.

1. a) What is the initial cash outlay (the total cash flow at t=0)? --> What is the step by step solution ?
2. b) What is the second year's cash flow (excluding the CCA Tax Shield)? --> What is the step by step solution ?
3. c) What is the last year's cash flow (excluding the CCA Tax Shield)? --> What is the step by step solution ?
4. d) What is the year 5 CCA? --> What is the step by step solution ?
5. e) What is the PV CCA Tax Shield? --> What is the step by step solution ?
6. f) What is the NPV of the replacement project? --> What is the step by step solution ?