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One of the assembly machines at ABC Limited needs to be replaced.
A replacement machine will cost $300 000, which will be paid on purchase. The replacement machine is expected to last for three years. It will need complete maintenance check-up in year 2 at a cost of $75 00.The existing machine assembles 4000 units per year.
The number of units assembled by the replacement machine is expected to be 35% lower in year 1 than the existing machine due to the time lost during installation and testing.
In year 2 it is expected that 4500 units will be assembled and this will increase by 20% each year compared to the previous year.The replacement machine will produce units at a cost of $24 each. From year 2 this will increase by 25% each year compared to the previous year.
The selling price will be $45 per unit. This will increase by 30% each year compared to the previous year.The cost of capital is 14%.It is assumed that all production will be sold.
REQUIRED
Question (i) report to the directors of ABC Limited to advice if the new investment should be under taken based on capital budgeting Technics.
Question (ii) Describe other factors that ABC Limited should consider be deciding to invest in this project.
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