Four years ago, the Westin Company purchased a semi-automated machine with an installed cost of $80,000....

 

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Four years ago, the Westin Company purchased a semi-automated machine with an installed cost of $80,000. It has an estimated life of 8 years from the time of purchase and is being depreciated using a straight-line method towards zero salvage value. This existing machine can be sold today for $10,000. A new, fully automated machine can be purchased for $100,000 and another $20,000 is required to have the machine installed and commissioned. It has a 4-year life and is expected to reduce operating expenses by $60,000 each year. Sales are not expected to change. The proposed new machine after 4 years, is expected to have an estimated salvage value of $20,000. The straight line depreciation method is also being used for the proposed new machine. If the proposed new machine is accepted, it is expected that net operating working capital would increase by $10,000. This investment would be fully recovered at the end of the project's life. The company cost of capital is 15% and its tax rate is 40%. As the newly appointed Financial Executive of this company, you are required to evaluate and make recommendations whether to proceed with the replacement. (NB: Use the NPV and IRR criterion) Four years ago, the Westin Company purchased a semi-automated machine with an installed cost of $80,000. It has an estimated life of 8 years from the time of purchase and is being depreciated using a straight-line method towards zero salvage value. This existing machine can be sold today for $10,000. A new, fully automated machine can be purchased for $100,000 and another $20,000 is required to have the machine installed and commissioned. It has a 4-year life and is expected to reduce operating expenses by $60,000 each year. Sales are not expected to change. The proposed new machine after 4 years, is expected to have an estimated salvage value of $20,000. The straight line depreciation method is also being used for the proposed new machine. If the proposed new machine is accepted, it is expected that net operating working capital would increase by $10,000. This investment would be fully recovered at the end of the project's life. The company cost of capital is 15% and its tax rate is 40%. As the newly appointed Financial Executive of this company, you are required to evaluate and make recommendations whether to proceed with the replacement. (NB: Use the NPV and IRR criterion)

Answer rating: 100% (QA)

To evaluate whether to proceed with the replacement we need to calculate the net present value NPV a... View the full answer