Erebor Sdn Bhd is considering a replacement of an existing machine. The new machine would cost RM315,000 and require an installation cost of RM35,000, modification cost of RM15,000, and shipping cost of RM15,000. Last year the training of machine operators had cost RM10,000. If the replacement takes place, the company would have to increase its inventories by RM30,000. The new machine has a useful life of 7 years and estimated to have a salvage value of RM30,000 at the end of its useful life. The purchase price of the existing machine was RM110,000 with a transportation cost of RM10,000. The existing machine has been in use for 5 years and could currently be sold for RM50,000. It has useful life of another 7 years with no salvage value. The company uses straight line method in depreciating its assets. Over its seven year life, the new machine should increase sales by RM120,000 per year. The new machine will increase the operating expenses by RM20,000 per year but decrease the cost of defects by RM30,000 per year. The company has fixed operating costs of RM20,000. The company requires a minimum rate of return of 15%, a desired payback period of 5 years and is subjected to a 28% tax rate. R (a) Calculate: i. The initial outlay ii. The annual differential cash flows iii. The terminal cash flows (b) Calculate: i. Payback period ii. Net present value (NPV) (c) Based on your calculation in part (b) should the existing machine be replaced? Why?
Erebor Sdn Bhd is considering a replacement of an existing machine. The new machine would cost RM315,000 and require an installation cost of RM35,000, modification cost of RM15,000, and shipping cost of RM15,000. Last year the training of machine operators had cost RM10,000. If the replacement takes place, the company would have to increase its inventories by RM30,000. The new machine has a useful life of 7 years and estimated to have a salvage value of RM30,000 at the end of its useful life. The purchase price of the existing machine was RM110,000 with a transportation cost of RM10,000. The existing machine has been in use for 5 years and could currently be sold for RM50,000. It has useful life of another 7 years with no salvage value. The company uses straight line method in
(a) Calculate: i. The initial outlay
ii. The annual differential cash flows iii. The terminal cash flows
(b) Calculate: i. Payback period
ii.
(c) Based on your calculation in part (b) should the existing machine be replaced? Why?
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