Calculate the net investment-net cash flow

Problem:

The capital budgeting department is contemplating whether to purchase a piece of equipment. The new piece of equipment costs \$900,000. The equipment currently being used by the firm would be replaced by the new and would be sold for \$100,000 which is the firm's book value for the asset. The estimated useful life of the new equipment is 3 years. The firm's capital gain tax rate is 20% and their ordinary tax rate is 40%. The new equipment is not expected to have a salvage value at the end of its useful life and the firm uses straight-line depreciation.

Estimated Earnings:

Year Without the new equipment    With the new equipment
1    \$500,000    \$1,200,000
2    \$700,000    \$1,500,000
3    \$900,000    \$1,900,000

Depreciation Information
Year    Without the new equipment    With the new Equipment
1    \$200,000    \$500,000
2    \$250,000    \$550,000
3    \$300,000    \$600,000

Calculate the net investment, net cash flows, the net present value and the Internal Rate of Return on this project assuming an 8% cost of capital.

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