KFUPM is planning to replace it heavy duty printing machine with a newer model that is faster and better quality. The existing machine has a life of 5 years and 2 years of them has passed. Now KFUPM is evaluating replacing this machine with the newer model which has a life of 3 years. KFUPM hired you to analyze the proposed replacement and you collected the below information.

New Machine:

Life of machine: 3 years

The cost of the new machine is SAR 965

The machine will increase the gross profit every year by SAR 303

The market value of the machine when sold at the end of its life is SAR 192

If replaced, then the net working capital (NOWC) will increase every year by SAR 20

KFUPM will recover all investments in working capital at the end of the new machine's life (after 3 years).

Old Machine:

Life of machine is 5 years. 2 years has past. Effective remaining life of the machine is 3 years.

Orginal cost of the existing machine is SAR 889

Total depreciation of the past 2 years is SAR  355.6

If KFUPM decided to go with the replacement proposal, then the existing machine can be sold right now at SAR 229

The market value of the machine when sold at the end of its life is zero (3 years from today)

WACC is

8.56%

Tax rate is 40%

Both machines use straight-line Depreciation.

Calculate the follwoing:

 

Transcribed Image Text:

Notes: 1. Use 2 Decimals 2. It is advisable to solve the question using Excel or on paper, and then put your relevant answers here: Depreciable base SAR is A1. New Machine: Yearo Year1 Year2 Year3 NOPAT + Dep. A2. Cash Flows from Working Captial (WC): Yearo Year1 Year2 Year3 (-) change in NOWC* *make sure to put the correct sign A3. Cash Flows from the Initial Outlay (I0): Year0 (-) 10 X *make sure to put the correct sign A4. Cash Flows from Terminal Cash Flows (TCF): Year3 TCF *make sure to put the correct sign A5. Free Cash Flows for New Machine (FCF_new): Yearo Year1 Year2 Year3 FCF_new *The sum of A1-A4 B1. Existing Machine: Year0 Year1 Year2 Year3 NOPAT + Dep. Notes: 1. Use 2 Decimals 2. It is advisable to solve the question using Excel or on paper, and then put your relevant answers here: Depreciable base SAR is A1. New Machine: Yearo Year1 Year2 Year3 NOPAT + Dep. A2. Cash Flows from Working Captial (WC): Yearo Year1 Year2 Year3 (-) change in NOWC* *make sure to put the correct sign A3. Cash Flows from the Initial Outlay (I0): Year0 (-) 10 X *make sure to put the correct sign A4. Cash Flows from Terminal Cash Flows (TCF): Year3 TCF *make sure to put the correct sign A5. Free Cash Flows for New Machine (FCF_new): Yearo Year1 Year2 Year3 FCF_new *The sum of A1-A4 B1. Existing Machine: Year0 Year1 Year2 Year3 NOPAT + Dep.

Answer rating: 100% (QA)

KFUPM is planning to replace the existing machine for a new model We have to compare between Existing machine and a new machine Step 1 Calculate Depreciation base Cost of asset Salvage value Depreciat... View the full answer