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Burton, a manufacturer of snowboards, is considering replacing an existing piece of equipment with a more sophisticated machine. The following information is given.

The proposed machine will cost $120,000 and have installation costs of$15,000. lt will be depreciated using a 3 year MACRS recovery schedule. lt can be sold for $60,000 after three years of use (before tax; at the end of year 3).

The existing machine was purchased two years ago for $90,000 (including installation). lt is being depreciated using a 3 year MACRS recovery schedule. lt can be sold today for $20,000. it can be used for three more years, but after three more years it will have no market value.

- The earnings before taxes and depreciation are as follows:

New machine: Year 1: 133,000, Year 2: 96,000, Year 3: 127,000

Existing machine: Year 1: 84,000, Year 2: 70,000, Year 3: 74,000

Burton pays 40 percent taxes on ordinary income and capital gains, and uses a WACC of 14%. The maximum payback period allowed is 3 years. They expect a large increase in sales so their Net Working Capital will increase by $20,000. a. Calculate the initial investment required for this project. b. Determine the incremental after-tax operating cash flows . Find the terminal cash flow for the project d. Find the Payback period, NPV, RR, and MlRR. e. Should the new machine be purchased? Why or why not?

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