Tashia Inc. builds and operates wind farms that generate electrical power using windmills. The firm has wind farms throughout the Southwest, including Texas, New Mexico, and Oklahoma. In the spring of 2017, the firm was considering an investment in a new monitoring system that costs $6 million per wind farm to install. The new system is expected to contribute to firm EBITDA via annual savings of $4.3 million in Year 1 and from Year 2, Year 3 and Year 4, the figure for each year will increase an amount of $800.000 (before taxes) over the previous year.

Tashia's CFO is interested in investing in the new system but is concerned that the savings from the system are such that the immediate impact of the project is so accretive to the firm's earnings that the individual unit managers will adopt the investment even though it may not be expected to earn a positive NPV. Moreover, the firm has just moved to an economic profit-based bonus system, and the CFO fears that the project may also make the individual economic profits improve dramatically in the short term- a development that would provide an added incentive for the wind-farm managers to take on the project.

a. Calculate the project's expected NPV and IRR. Assuming that the cost of capital for the project is 10%, the firm faces a 28% marginal tax rate, it uses straight-line depreciation for the new investment over a four-year project life, and it has a zero-salvage value. The firm expects 5% of its previous year-end invested capital to invest in its net working capital for each year.

b. Calculate the annual economic profits for the investment for Years 1 through 4. What is the present value of the annual economic profit measures discounted using the project's cost of capital?