Rocky Mountain Chemical Corporation (RMC) is thinking of replacing the packaging machines in its Texas plant. Each packaging machine currently in use has a net book value of $1 million and will continue to be depreciated on a straight-line basis to a net book value of zero over the next 5 years. The plant engineer estimates that the old machines could be used for as many as ten more years. The purchase price for the new machines is $5 million apiece, which would be depreciated over a ten-year period on a straight-line basis to a net book value of $500,000 each. Each new machine is expected to produce a pretx operating savings of $1.5 million per year over the machine it would replace.
RMC estimates that it could sell the old packaging machines for $250,000 each. Installation of each new machine would be expected to cost $600,000 in addition to the purchase price. Of this amount, $500,000 would be capitalized in the same way as the purchase price, and the remaining $100,000 would be expensed immediately. Because the new machines are so much faster than the ones they would replace, the company's average raw materials inventory account would need to be increased by $30,000 for each new machine. Simultaneously, because of trade credit, accounts payable would increase by $10,000. Finally, management believes that even though the new machines would have a nete book value of $500,000 at the end of ten years, it would be possible to sell them for only $300,000, with removal and cleanup cost of $40,000. The changes in working capital (inventory and payables) are fully reverseable at the end of the 10-year life of the machines.
If RMC has a marginal tax rate of 40%, what would be the after-tax incremental expected Initial Investment, annual operating, and terminal value cash flows associated with each new machine? If the project's required return is 12%, what is the project's IRR, MIRR, and NPV?