QUESTION $18$

a$.$ CBC Manufacturing Ltd$.$ is considering the replacement of an existing machine. The new machine costs K $1\mathrm{.}2$ million and requires installation costs of $K150,000.$ The existing machine can be sold currently for K$185,000$ before taxes. It is $2$ years old, cost $K800,000$ new, and has a $K384,000$ book value and a remaining useful life of $5$ years. Over its $5-$year life, the new machine should reduce operating costs by K$350,000$ per year. The new machine can be sold for K$200,000$ net of removal and cleanup costs at the end of $5$ years. An increased investment in net working capital of $K25,000$ will be needed to support operations if the new machine is acquired. Assume that the firm uses straight$-$line depreciation, has a $9\%$ cost of capital and is subject to a $40\%$ tax rate.

i$.$ Determine the net present value $($NPV$)$ of the proposal.

$(8$ marks$)$

ii$.$ Determine the internal rate of return $($IRR$)$ of the proposal.

$(8$ marks$)$

iii. Make a recommendation to accept or reject the replacement proposal, and justify your answer.

$(4$ marks$)$