Problem:
A firm is considering investing $10 million in equipment that is expected to have a useful life of four years and is expected to reduce the firm's labor costs by $4 million per year. Assume the firm pays a 40% tax rate on accounting profits and uses the straight-line depreciation method. What is the after-tax cash flow from the investment in years 1 through 4? If the firm's hurdle rate for this investment is 15% per year, is it worth while? What are the investment's IRR and NPV?