Humble Beginning Manufacturing Company purchased a specialized production machine a year ago for R180,000. During that...

 

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Humble Beginning Manufacturing Company purchased a specialized production machine a year ago for R180,000. During that time, the machine was estimated to have a useful life of 6 years with no scrap value. The annual cash operating cost was estimated at R300,000. A new modernized production machine has just come on the market that will do the same job but with an annual cash operating cost estimated at R255,000. The new machine costs R315,000 and has an estimated life of 5 years with zero scrap value. The old machine can be sold for R150,000 to a scrap dealer. The company uses a straight-line depreciation, and the company tax rate is 30 percent. If the cost of capital is 8% after tax, calculate: The initial project outlay cost. Incremental cash inflow after tax. NPV of the new investment. IRR on the new investment. What are your recommendations? Explain. (4) (5) (6) (3) (2) Humble Beginning Manufacturing Company purchased a specialized production machine a year ago for R180,000. During that time, the machine was estimated to have a useful life of 6 years with no scrap value. The annual cash operating cost was estimated at R300,000. A new modernized production machine has just come on the market that will do the same job but with an annual cash operating cost estimated at R255,000. The new machine costs R315,000 and has an estimated life of 5 years with zero scrap value. The old machine can be sold for R150,000 to a scrap dealer. The company uses a straight-line depreciation, and the company tax rate is 30 percent. If the cost of capital is 8% after tax, calculate: The initial project outlay cost. Incremental cash inflow after tax. NPV of the new investment. IRR on the new investment. What are your recommendations? Explain. (4) (5) (6) (3) (2)

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Lets break down the calculations step by step 1 Initial Project Outlay Cost The initial project outlay cost includes the cost of the new machine and a... View the full answer