Case Study 1 (40 marks)

Ace Ltd is considering investing in either Machine A or B to produce an existing product. The present equipment will be scrapped. Machine A involves a cost of R55 million and has a five year economic life. It will result in after-tax savings of R10.85 million per year owing to increased efficiencies. Machine B involves a cost of R60.5 million and has a ten-year economic life. Machine B will result in after-tax savings of R9.5 million per year. The demand for the product is expected to last another 20 years. The firm's cost of capital is 10%. Prices of machinery are not expected to increase over the next five years. Each machine is expected to have a residual value of zero at the end of their economic lives.

Assume a tax rate of 30%

Discount factors at selected discount rate are as follows:
	4%	6%	8%	10%
Year 1	0,962	0,943	0,926	0,909
Year 2	0,925	0,89	0,857	0,826
Year 3	0,889	0,84	0,794	0,751
Year 4	0,855	0,792	0,735	0,683
Year 5	0,822	0,747	0,681	0,621

Required:

1. What is the NPV of each machine, assuming no depreciation deduction? (14 marks)

2.

Determine whether the firm should acquire Machine A or Machine B, if both machines qualify for a straight-line depreciation deduction over their economic lives. (26 marks)