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Determine the relevant cash flows for the project

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Question - Beta Electronics is a firm specialising in manufacturing electronic components in Fiji. The firm's management is considering replacing the hand-operated machine with a fully automated machine. The company pays tax on profits at a rate of 20%. The cost details of existing and proposed machine are as follows:

Existing Machine One part-time operator $12000 plus fringe benefits of $1000 per year

Variable overtime - $1000 per year

Costs of defects- $6000 per year

Current book value- $10000

Expected original life - 15 years; current age - 10 years

Expected salvage value, 15 years - $0

Annual depreciation- $2000

Current salvage value- $12000

Annual maintenance- $0

Proposed Machine

No operator required

Cost of machine - $50000

Shipping fee- $1000

Installation costs- $5000

Depreciation method - straight line over 5 years

Salvage value after 5 years - $0 Annual maintenance- $1000

Cost of defects - $1000 per year

REQUIRED - Determine the relevant cash flows for the project and calculate the NPV using a required return of 12%. Show all relevant equations and calculations.

Reference no: EM132641176

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