Jackson Manufacturing Ltd. manufactures a clothes dryer with a machine which was purchased six years ago...

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Jackson Manufacturing Ltd. manufactures a clothes dryer with a machine which was purchased six years ago for $2,500,000. The clothes dryer is priced at $450 per unit and has variable costs of 43% of the selling price. The existing machine has reached its annual production capacity of 20,000 units and the company is considering replacing it with a new machine. If the existing machine is not replaced, it is expected that it will require repair and maintenance work costing $25,000 every two years from today. The new machine that the company has identified will cost $4,400,000 with an extra installation cost of $50,000. It will have an annual capacity of 40,000 units. The new machine is also more efficient and variable costs are expected to reduce to 40% of the selling price. Due to the anticipated increase in production, more space is required and this will mean having to repossess an existing floor area which is currently rented to an external tenant for $50,000 per year. It is also estimated that accounts receivable, inventory and accounts payable will increase by $20,000, $45,000 and $25,000 respectively. The effect on cash flows from this change in net working capital is expected to commence at the beginning of the project and will be recovered when the project is terminated. A recent seven-year sales forecast conducted by management indicates that sales volume will be 20,000 units next year, 23,000 in year 2, 25,000 in year 3, 30,000 in year 4, 25,000 in year 5, 15,000 in year 6 and 8,000 in year 7. Demand for this product is forecast to drop significantly from the seventh year and the company plans to terminate the production at the end of year 7. The company has a depreciation policy of straight-line over eight years for this type of machinery. The company estimates that it can sell the existing machine today for $100,000 or for $5,000 if used for another seven years. The new machine can be sold for $200,000 at the end of the project. Corporate tax rate is 28%. The company's cost of capital is 11% and it has a policy of requiring a payback period of not more than three years for capital investments. Required a) Determine the relevant incremental cash flows for the replacement of the existing machine. (13 marks) b) Calculate the payback period, net present value and the internal rate of return of this project. (7 marks) Jackson Manufacturing Ltd. manufactures a clothes dryer with a machine which was purchased six years ago for $2,500,000. The clothes dryer is priced at $450 per unit and has variable costs of 43% of the selling price. The existing machine has reached its annual production capacity of 20,000 units and the company is considering replacing it with a new machine. If the existing machine is not replaced, it is expected that it will require repair and maintenance work costing $25,000 every two years from today. The new machine that the company has identified will cost $4,400,000 with an extra installation cost of $50,000. It will have an annual capacity of 40,000 units. The new machine is also more efficient and variable costs are expected to reduce to 40% of the selling price. Due to the anticipated increase in production, more space is required and this will mean having to repossess an existing floor area which is currently rented to an external tenant for $50,000 per year. It is also estimated that accounts receivable, inventory and accounts payable will increase by $20,000, $45,000 and $25,000 respectively. The effect on cash flows from this change in net working capital is expected to commence at the beginning of the project and will be recovered when the project is terminated. A recent seven-year sales forecast conducted by management indicates that sales volume will be 20,000 units next year, 23,000 in year 2, 25,000 in year 3, 30,000 in year 4, 25,000 in year 5, 15,000 in year 6 and 8,000 in year 7. Demand for this product is forecast to drop significantly from the seventh year and the company plans to terminate the production at the end of year 7. The company has a depreciation policy of straight-line over eight years for this type of machinery. The company estimates that it can sell the existing machine today for $100,000 or for $5,000 if used for another seven years. The new machine can be sold for $200,000 at the end of the project. Corporate tax rate is 28%. The company's cost of capital is 11% and it has a policy of requiring a payback period of not more than three years for capital investments. Required a) Determine the relevant incremental cash flows for the replacement of the existing machine. (13 marks) b) Calculate the payback period, net present value and the internal rate of return of this project. (7 marks)

Answer rating: 100% (QA)

a Re levant incremental cash flows for the replacement of the existing machine 4 400 000 cost of new ... View the full answer