Question 2

Seong Seng Coachbuilders is considering purchasing a new machine to replace an old one.

Cost of new machine

Purchase price$85,000

Installation and Commissioning $ 10,000

The proposed new machine is to be depreciated using the straight-line method over its four-year useful life with an estimated salvage value of $ 15,000.

The proposed new machine is expected to increase sales and operating expenses and the amount are expected to be constant over the project's 4-year life.

Sales $65,000

Operating expenses $ 26,000

Seong Seng operating working capital is also expected to increase as follows;

Inventory $ 12,000

Accounts receivable $ 8,000

Accruals $ 3,000

Accounts payable $6, 000

The old, existing machine is also being depreciated using the straight-line method over its 6 years useful life towards zero salvage. It was purchased 2 years ago with a total depreciable value of $60,000. It can be sold today for $ 38,000.

Seong Seng tax bracket is 40% and its management uses 20% required rate of return to evaluate this replacement project. Using the NPV and IRR criteria, is this project viable?