JB Private Limited was first established in 2005, initially located at Kharadar, Karachi and since remained one of the leading firm in Pakistan to date. The firm mainly dealing in education and textile sector. With the wish or commitment to employing the most modern technology for smooth working condition or environment, enhancement in payroll of employee commensuration with society standard of living, the board of directors decided to replace current machine (i.e. technology) with the newer one which will increase productivity of company. Currently company operating with following facts. Cost of machine - Existing Technology Current selling price of Existing Technology Salvage value of Existing Technology Life of Existing Technology Current age of Existing Technology The details of working capital investment associated with existing technology is as follows Cash and cash equivalent Short term investment Account receivable Inventory PKR 150000 100000 50000 10 years 5 years PKR 40000 30000 5000 5000 The decision of replacement is too comprehensive and summary of activities include procurement, plant installation and other administrative activities. Initially the procurement department as per findings of R & D, will buy the machine with new technology from vendor at purchase price of PKR 200,000 excluding import duty & Sales tax PKR 100,000. Other capital and revenue expenditure while buying incurred by firm are mentioned below. Installation cost Insurance in transit Transportation inward Foundation, testing and running cost Routine training cost (before operating machine) The latest technology has a useful life of 5 Years and estimated salvage value PKR 100000. The details of working capital investment associated with New technology is as follows Cash and cash equivalent Short term investment Account receivable Inventory PKR 45000 35000 15000 15000 10000 Stores and spares Current annual sales of organization are PKR 400,000 @ 100 each unit. Company currently buying raw material at RS 5 per Kg and each unit required 2 kg. Company paying wages @ 2 per hour and each unit production required 5 hours. Current Other overhead includes rent of factory & indirect labor cost Rs10000 and Rs2000 respectively, where indirect labor is pure variable. These overhead does not include cost of depreciation. Expected inflation from next year will be 10% each year for all Kind of prices either selling or buying. Company also interested / targeted to produced and sold 115% of every previous year. Old machine can only produce current level units every year, the changes expected in production sold units is due to change of technology i.e. machine and will be applicable from next year. In current year all the contents of production & Sales of old & new technology will be same except depreciation. The company is in 40% Tax bracket. PKR 20000 20000 10000 50000 20000 The company's manager risk / uncertainty is expecting deviation of 20% in every year's incremental cash flows up and down with chances of 30% & 40% respectively and remaining chances are allocated to same amount. Read the information given above about AB company and calculate following. 1. Total cost of proposed machine (Total Capital expenditure) 2. Depreciable cost of proposed & old machine. 3. Change in investment in working capital. 4. Initial cash outlay, Annual cash inflow from old, Annual cash inflow from new, Incremental yearly cash inflows & Terminal cash flow for replacement decision. 5. Draw time line depicting whole life of decision. 6. Net cash flow, cash flow ratio, accounting rate of return, Payback period, Net present value, Profitability index and Discounting payback. 7. Draw tree diagram for all possible cash flow stream of replacement decision depicting changes in cash flows & probabilities. 8. NCF & NPV of all roots of tree or branches of tree. 9. Expected value of NPV, Expected standard deviation & variance, Coefficient of variation. 10. Limits Mean S.D, Mean 2S.D and Mean 3S.D Assume Opportunity Cost 10% and Risk adjusted Discount Rate 5%