REQUIRED

$($a$)$ Develop the relevant cash flows to analyze the proposed replacement.

$($b$)$ Determine the payback, net present value $($NPV$)$ and the internal rate of return $($IRR$)$ of the proposal.

$($c$)$ Make a recommendation and justify your answer.

PLEASE NOTE

One requirement of the course is that students work in groups in order to solve specific problems. This assignment will, however, not be marked and counts nothing towards the year mark.

Holiday Manufacturing is considering the replacement of an existing machine. The new machine costs R$1,2$ million and requires installation costs of R$150000.$ The existing machine can be sold today for R$185000$ before taxes. It is $2$ years old, cost R$800000$ new, and has a remaining useful life of $5$ years. It is being depreciated under the straight line method over an economic life of $5$ years. If held until the end of $5$ years, the machine's market value would be RO$.$ Over its $5-$year life, the new machine should reduce operating costs by R$350000$ per year. The new machine will be depreciated under the straight line method over an economic life of $5$ years. After $5$ years the new machine can be sold for an estimated R$200000$ net of removal and cleanup costs. An increased investment in net working capital of R$25000$ will be needed to support operations if the new machine is acquired. Assume that the firm has adequate operating income against which to deduct any losses experienced on the sale of the existing machine. The firm has a $10$ percent cost of capital and is subject to a $30$ percent tax rate.

REQUIRED

$($a$)$ Develop the relevant cash flows to analyze the proposed replacement.

$($b$)$ Determine the payback, net present value $($NPV$)$ and the internal rate of return $($IRR$)$ of the proposal.

$($c$)$ Make a recommendation and justify your answer.