Baba Rafi wants to replace their existing BBQ machine in front of NSU gate 1 with a newly improved and more efficient equipment. The new machine will include grilling, as well as baking options with a burner. This means Baba Rafi is considering the introduction of flat bread pizzas. The old one costs $500,000 and was bought 5 years back. The old machine should run for 5 more years.

Today salvage value of the old machine is $265,000 and from 5 years from now it should be $10,000.

Currently the old truck uses the straight-line method of depreciation. The replacement will also require an initial investment in current assets of $20,000, of which $10,000 will be coming from short-term creditors (hint: working capital = CA-CL).

The new BBQ machine, which will be in operation for 5 years, will cost the company $650,000. For the new equipment the company will follow a three years MACRS depreciation schedule and the depreciation percentage every year for the new truck is given below.

Year 1              Year 2          Year 3               Year 4

.3333               .4444            .1482               .0741

Tax rate is 40%

Required

a) Using the above-mentioned information give your justification whether Baba Rafi should replace its current BBQ machine with the new composite machine using the NPV. The

WACC is 12%.