Reference no: EM132750952
Uranus Sdn. Bhd is a famous shoes manufacturer in Malaysia. Recently, the management is considering to replace its old processing machine with a new sophisticated model. The old machine is bought at RM48,000 six years ago and has two years remaining. If the company sell this machine, the salvage value is RM15,000. The new machine costs RM60,000 and has remaining life of 5 years. The management believes that the new machine can produce better quality product and can achieve higher customers' satisfaction. The usage of new machine is expected to increase revenue of RM12,000 per year. Besides, it can save annual operating cost as follows.
Old Machine
New machine
Maintenance cost
RM2,000
RM2,500
Defect cost
RM3,000
RM1,000
Operating costs
RM40,000
RM35,000
Both machines are depreciated using simplified straight line and assuming the book value is 0. The marginal tax rate is 28% and internal rate of return is 12%.
i) Calculate project's initial outlay
ii) Calculate annual cash flow
iii) Calculate terminal cash flow
Determine NPV of the project. Decide whether the company should/should not replace the old machine.